Wanna Buy a Siebel?

Anyone got a spare $4 billion and change to buy Siebel Systems (NASDAQ:SEBL)?

For the last couple of months, the media have buzzed about a potential acquisition of the software firm. Bear in mind that a potential buyer would have to pay some kind of premium on top of its value -- $4.3 billion, as of the close of market Aug. 4. That's a pretty large sum for a potential acquirer to fork out.

On May 28, Silicon Valley's San Jose Mercury News reported tensions between the company and its large investors regarding an employee benefit plan. Siebel increased employee benefits, which some observers saw as a tactical move to make Siebel more expensive to a potential acquirer.

On May 30, eWEEK.com reported that Siebel would continue with its technology development road map despite some recent management changes. The company still plans to release Siebel 8.0 in 2006, an upgrade from the current (outdated) Siebel 7.0 products. Recall that in April, former Siebel CEO Michael Lawrie was booted from the firm. In May, Eileen McPartland, Siebel's former SVP of global services, resigned.

But I doubt Siebel is in play. We're probably seeing the results of a familiar Wall Street daisy chain.

That old "sell-side two-step"
Some sell-side analyst (an analyst who works for a brokerage or bank that manages accounts for clients) raises the possibility of an acquisition. That rumor then reverberates through the media and the investment community, generating hype and commissions for the bank. In addition, the analyst has the ability to point to the "early call" if the acquisition actually happens. It's not impossible that Siebel would be acquired, but I don't think it's likely.

I did notice that putting a change-of-control parachute for employees in the new benefits plan acts like a poison pill, but I'm not convinced the plan was conceived with that intention.

A poison-pill provision authorizes the corporate board of a company targeted by a hostile takeover bid (or concerned that one may lie ahead) to enact a shareholder-rights plan. For instance, the company may issue preferred stock that gives shareholders the right to redeem their shares at a premium after a takeover. The target company defends itself by making its stock less attractive to an acquirer. Without authorization from the board, a poison pill cannot be instituted, or can be more vulnerable to attack by hostile bidders or regulators.

In any case, these kinds of benefits mechanisms -- whether intended as a pill or not -- help keep employees from worrying about their job security and the company's future.

What's in it for a potential buyer?
Why buy Siebel, anyway? I honestly can't see much value in it.

The company has its own problems -- just read its last earnings report. Slowing software sales led to quarterly revenues around $300 million, $7 million below prior expectations. License revenue was down 41% year-over-year to $75 million, the lowest absolute amount in seven years.

Another indication of low-quality earnings: Around 37% of Siebel's net income for fiscal 2004 came from interest income on the cash balance. Last I knew, Siebel was supposed to be selling software, not investing in interest-bearing securities.

Siebel does have more than 4,000 corporate customers and more than 3.2 million users. It also has roughly $470 million in annual maintenance revenue -- that's sales of services to existing customers, which includes training and consulting.

Siebel's greatest asset may be the cash on its balance sheet -- $2.2 billion (around $4.10 per share), which keeps a floor under the stock price. It also provides management with some flexibility to finance new strategic options and buys the company time to set its direction. Let's hope management uses that time wisely.

Giving back some of that cash isn't a bad idea, and some of Siebel's $2.2 billion balance sheet has indeed found its way to shareholders. Management recently announced that it would start paying a quarterly $0.025-per-share dividend, for a modest 1.1% dividend yield. This uses around $50 million, or 2%, of Siebel's cash balance, and around one-third of its free cash flow (using fiscal 2004 levels).

Dressing up for a sale
Siebel needs to do a lot of things differently to succeed. A potential buyer would have to address:

Sales: The sales process and sales team have not evolved to the realities of today's market. The salespeople aren't aware of all the hoops they have to jump through to close deals and therefore aren't pushing hard enough.
Marketing: The marketing message does not adequately recognize the value of analytics and visibility. Siebel needs to place more emphasis on analyzing and understanding its target markets, its customers, and their needs -- a sure way of getting more deals sold more quickly.
Product: The company should acquire reporting and analytics software to improve its offerings in these areas.

I don't think the software business in general is any stronger today than it was last year. Software's just like any other capital good: A strong cycle is followed by a weak one. Companies bought too much software/hardware in the 1990s. During the recession, they realized they didn't "have" to buy anything. CFOs, meanwhile, have centralized and elevated software spending decisions. It's harder to sell any kind of software now. When times were great, Siebel had a killer sales force; that's no longer the case.

In addition, Siebel is getting squeezed by new competitors Salesforce.com (NYSE:CRM) and RightNowTechnologies (NASDAQ:RNOW). Its customer base is eroding, since many customers didn't see adequate returns on their CRM investments. Management doesn't disclose its maintenance renewal rates, but suppliers and customers indicate that Siebel suffers from a high level of attrition and unused software.

One of the biggest illusions of the 1990s was customer relationship management (or CRM) software. There are a handful of companies that need a single, unified CRM application. But most require separate applications for sales force automation, marketing automation, call center automation, customer support automation, maintenance dispatching, and so on. Customers have bought into Salesforce.com's message because they need simple sales force automation, including salespeople's ability to access their systems easily on the road. They don't have the time, money, or inclination to buy a "CRM solution."

"Improvable" but not "sellable"
That said, Siebel's problems aren't irreparable. It's still a great franchise, even if the organization's mindset remains stuck in the 1990s. Any acquirer would have to hope that relatively new CEO George Shaheen (or an entirely new management team) could perform an internal turnaround. Shaheen needs the sense to see through Siebel's haze of troubles and focus the company on what counts.

Bottom line: You could shell out $4.6 billion (plus a premium) to buy a bloated, underperforming whale like Siebel. But who would want to?

Tomorrow, I'll talk about why Siebel might want to sell, and who the buyers might be. Could it be Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL), or IBM (NYSE:IBM)? I'll also talk about Siebel's financials, and whether it makes sense for individual investors to own shares of the company, buyout possibility or not.

Was Siebel ever a Rule Breaker ? Find out what David Gardner's looking for in his quest for the next big thing. A free, 30-day trial is yours today. There's never any obligation to buy.

Further Siebel-related Foolishness:

Fool contributor MelanieHollands does not own shares in any company mentioned.

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