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Tech Industry

Tech shareholder activism on the rise

Management teams are finding themselves increasingly under fire, as shareholder proposals head toward a new high.

As many technology sectors mature, the companies that populate them are being forced to grow up. And that means that their shareholders are growing increasingly bold in holding their management teams accountable.

With shareholder activism on the rise in the tech sector, management teams are taking flak for indifference to investors, being less than forthcoming with important information, and letting sizable cash piles languish.

New data from several sources shows an increase in shareholder proposals related to corporate governance at some companies, as evidenced by a raft of recent high-profile disputes between shareholders and management. Whether or not formal proposals are filed by shareholders, the increasing dissent is obvious.

Activist shareholder Robert Coates is preparing a proposal to break up Borland Software, while investment banker Bryant Riley is pushing plans at chipmaker Alliance Semiconductor and software company Selectica. Struggling customer relationship management software supplier Siebel Systems has been a major target of shareholder ire, too.

During the first seven months of 2005, there have been 118 shareholder proposals at the 750 public companies tracked by the Washington, D.C.-based Investor Responsibility Research Center. Roughly the same number was counted in all of 2004, a year when the corporate governance research company tracked 820 companies.

Data from Corporate Library, a research organization that collects data on corporate governance issues, shows that shareholder proposals at technology-related companies have been rising relatively steadily since the tech bubble burst, and appear to be heading toward a new high this year. The Portland, Maine-based company reported 87 proposals in 2004; so far in 2005 it has counted 75. (Software companies were excluded from the firm's data because their results are included with publishing and media firms.)

David Parker, managing director and head of the technology and communications M&A practice with Minneapolis-based investment bank Piper Jaffray, said he is getting an increasing number of calls from shareholders who want to initiate transactions and generally be more proactive about their holdings.

"No longer is it the case that management decisions are sacrosanct," he said.


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On the other hand, along with the increase in activism, company leaders generally tend to be more receptive to shareholder issues in a post-Enron world, said Mario Cibelli, managing member of New York-based investment fund Marathon Partners.

A significant portion of the increase in activism stems from a focus on stock option expensing. However, many dissident shareholders are concerned with some more intrinsic business issues, such as disclosure and what to do with cash reserves.

"After the tech bubble, the industry fell off its pedestal, and with that comes more ownership scrutiny and a diminished ability for the industry to ignore the rules of the game," said Ted White, deputy director of the Washington D.C.-based Council for Institutional Investors.

The piles of cash that many technology firms are sitting on have created tensions between management and shareholders, especially since technology companies tend to generate and hold significantly more cash than other industries.

"The reality of the last couple of years is that there are a lot of tech companies that are not earning their cost of capital and have significant cash that is sitting idle," White said.

It's an issue Siebel tried to address in June by announcing a 2.5 cent quarterly dividend, which will amount to about $51 million annually from its $2.2 billion cash hoard.

The move didn't satisfy shareholders, who went ahead and withheld votes during the recent re-election of the unopposed board of directors. Fourteen percent of shareholders refused to cast a vote for chairman Tom Siebel.

Complaints of idle cash are a large part of what's behind a recent proposal aimed at Selectica. Riley, CEO of Los Angeles-based brokerage company B. Riley, has notified the San Jose, Calif.-based company that he plans to propose eliminating the company's staggered board elections and giving the shareholders the ability to call special meetings.

Riley also has railed against Selectica's $100 million cash cache, arguing the money should be returned to shareholders or used for accretive acquisitions.

Selectica had tried to spend some of its cash acquiring I-many in Edison, N.J., for $70 million, but the target's shareholders scuttled the proposal. That rejection had repercussions for I-many, which is now taking heat from New York-based activist hedge fund Ramius Capital Group. The firm has demanded a list of I-many shareholders so it can solicit votes for directors at the annual meeting next June.

Shareholders also are criticizing Selectica for another issue that other technology companies are dealing with--an alleged lack of disclosure. Sources close to Trilogy, an Austin, Texas-based software company that offered to buy Selectica for about $130 million in January, say Selectica's board had received the offer from Trilogy long before it was made public to shareholders. The news only surfaced after Trilogy issued its own press release disclosing its $4 per share offer. Selectica's board rejected the offer.

Riley has said he would like to see the Trilogy offer considered. Yet Selectica continued to pursue the I-many deal even though some of I-many's shareholders didn't support it.

Piper Jaffray's Parker said he's seeing more willingness by technology company management teams to make competing bids for a target that has already agreed to be acquired by another. This has historically been frowned upon in the tech sector, but it often gives shareholders more options than the target's management has put before them.

"There has been manifestation of a real shift in the mindset of management and boards at tech companies to employ tactics that were not used in the tech acquisition world," Parker said. "But as the tech industry matures, it is beginning to make the kinds of transactions that are made in mature industries."

And that could spell more growing pains for technology company management teams.

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