Were Secret Talks on Software Deal Not Very Secret?


Some lucky investors were piling into shares of Broderbund Software before its $400-million merger agreement with Electronic Arts was announced late Wednesday--raising the question of whether there was a leak about the deal.

On Thursday, Broderbund’s stock reacted to the merger announcement by soaring $4.625 to $45.875 a share in Nasdaq trading. But the price had been rising steadily Monday, Tuesday and Wednesday--up $1.75, $2 and $3.75 respectively--during the secret talks between the two interactive software companies.

In contrast, Electronic Arts, which is the acquirer in this deal, saw its shares edge lower between Monday and Wednesday.


The upshot: Buyers of Broderbund at Monday’s low of $33 have made 39% this week by grabbing the stock before the merger announcement.

What’s more, trading in call-option contracts on Broderbund’s stock on the Chicago Board Options Exchange also surged this week. A call gives the buyer the right to acquire a given stock at a set price in the future--a way to lock in a profit in advance if you expect the stock to soar.


Could there have been a leak of the deal? Broderbund spokeswoman Robin Linstrom in Novato, Calif., said the firm was obviously aware of the stock’s rise before the announcement, and tried to track down what was moving it. “I heard no rumors on (Wall) Street regarding Broderbund and Electronic Arts,” she said.

Todd Bakar, analyst at brokerage Hambrecht & Quist in San Francisco, agreed. “I heard not a peep about this” in the market, he said. But Bakar added that the stock’s action “looks a little strange.”

Analysts said some buyers of Broderbund this week probably were motivated by continuing rumors that the firm is set to buy the electronic rights to Dr. Seuss characters for use in interactive home software programs. In addition, on Tuesday, Broderbund competitor Sierra On-Line announced strong home-software sales gains in its latest quarter. That sent its shares up $3.375 to $22.875 that day, and refocused investor attention on the industry.

A research report released last Friday by San Francisco-based investment bankers Robertson Stephens & Co. also may have helped Broderbund’s stock. The report, by Robertson analyst Peter Rogers, reiterated his “buy” recommendation for Broderbund, though it mentioned nothing about a possible takeover.


Coincidentally, Robertson also is the banker representing Broderbund in the merger talks. Which raises the question: Should Robertson have allowed its analyst to put out that report so close to the consummation of a surprise merger?

Robertson President Michael McCaffery noted that his firm, like all brokerages, has a “Chinese wall” between its banking department and its research department, to avoid potential conflicts of interest. So analyst Rogers knew nothing about the pending deal, McCaffery said.

Frequently, when a brokerage is working secretly on a merger, it will put a moratorium on comment from its research side without explaining why. But McCaffery points out that such moratoriums create conflicts in and of themselves, by immediately confirming for outsiders that something is brewing.

Because the research report was a reiteration of the analyst’s “buy” recommendation, not a change in his outlook, McCaffery said the firm thought it best not to raise suspicions by quashing the report.

Lucky thing for any Robertson clients who took Rogers’ advice. Unlucky for anyone who sold out their Broderbund shares to those eager buyers who appeared before the deal was made public.

SEC Wants Fund Trading Data: As expected, the Securities and Exchange Commission has launched a major probe of mutual fund managers’ personal-account trading habits since recent disclosures of controversial trading by a star Invesco Funds manager.


The SEC said Thursday it has requested extensive information from 30 fund companies, none of which it named, to determine whether the funds’ internal controls over manager trading are adequate. Among other things, the SEC will review the funds’ codes of ethics, any recent violations by managers of in-house rules, and how trading in managers’ personal accounts compares to the trades they have made for their funds.

With the rapid growth of the fund industry since 1991, concern has mounted about the potential for fund managers to enrich themselves by personally trading in stocks ahead of transactions they make for their funds. Most fund companies have stringent controls over such activities, but for political reasons, the SEC has been expected to take a closer look at fund practices.

Pre-Merger Excitement

Though Electronic Arts’ negotiations to buy Broderbund Software were secret, Broderbund’s shares surged between Monday and Wednesday, just before the deal was announced.

Day Broderbund Elec. Arts Friday 33 3/4, -2 25 1/2, -1 Monday 35 1/2, +1 3/4 26, + 1/2 Tuesday 37 1/2, +2 26 1/4, + 1/4 Wednesday 41 1/4, +3 3/4 25 1/2, - 3/4 Thursday 45 7/8, +4 5/8 29, +3 1/2

Stocks trade on Nasdaq