IBM Launches Hostile Bid for Lotus Software

Signaling in dramatic fashion its determination to compete for computer industry leadership once again, International Business Machines Corp. on Monday launched a surprise $3.3-billion hostile takeover offer for software pioneer Lotus Development Corp.

If completed, the acquisition would be the largest ever in the computer software business and would enable IBM to challenge the seemingly unstoppable Microsoft Corp. in key segments of the personal computer software industry. Lotus reacted negatively to the offer and said it would consider its options, but most analysts expect IBM to prevail.

“This transaction makes a lot of sense for everyone involved,” said IBM Chairman and Chief Executive Louis V. Gerstner. “We see the world in the same way in terms of how computing will evolve. We think we have offered a very good and fair price for Lotus.”

The $60-per-share offer was nearly double the price at which Lotus had been trading, and Lotus shares accordingly soared $28.94 to close at $61.44 in very heavy trading on NASDAQ. Some investors believe that a competing bidder, such as AT&T; Corp. or Oracle Corp., might now join the fray and drive the price even higher. IBM shares closed down $2.63 at $91.25 on the New York Stock Exchange.

IBM has spent most of the 1990s laying off workers, closing factories and overhauling management in a desperate effort to adapt itself to a computer industry dominated not by the giant mainframes that made IBM famous, but by the humble personal computer. Those efforts have recently begun bearing fruit, and the Lotus bid shows that Gerstner--hired two years to engineer a turnaround--now believes the company, with $10 billion in cash, is healthy enough to take the offensive.

Lotus, whose 1-2-3 spreadsheet program was one of the most important products in the history of the personal computer, has been stumbling along for years in Microsoft’s shadow, steadily losing market share in the spreadsheet business and failing in various efforts to build new businesses.

But Lotus has in recent years come up with one big winner: Notes, a program that enables people in different locations to share documents and otherwise collaborate electronically. In Notes, IBM would have a unique and strategically important product to sell its large corporate customers--a product that Microsoft has as yet been unable to match.

Ever since it won a contract to supply the operating software for the first IBM PC, Microsoft has been building its power and influence--and the dominant position it enjoys in the PC industry today has come largely at the expense of one-time partner IBM. Microsoft’s Windows software has become the standard for PCs--soundly trouncing IBM’s OS/2--and it now dominates the market for spreadsheets and other applications programs has well. With Lotus, IBM might be able to credibly challenge that dominance, especially among business customers. Microsoft declined to comment Monday.

Gerstner said IBM resorted to a hostile tender offer after five months of negotiations failed to result in a friendly merger agreement.

Lotus Chairman and Chief Executive James P. Manzi, however, offered a wildly different version of events.

“I want to make one thing clear. . . . We have not been negotiating an acquisition of Lotus with IBM,” Manzi said. “We have been in negotiation about something completely different . . . that involves product opportunities between the two companies.”

A clearly angry Manzi said he was first informed of IBM’s intentions “about five minutes before it was announced” during an early morning telephone conversation with Gerstner. “We haven’t been shopping the company to anybody, categorically,” Manzi said.

Still, Lotus has been the subject of acquisition rumors for many months, with AT&T; topping the list of prospective suitors. “I don’t think anyone here is really surprised,” said one Lotus insider. “This kind of speculation has been going on since November. On any given day it’s been Oracle, AT&T; or IBM. . . . It’s just a little more turmoil around here.”

Despite Manzi’s opposition to a deal, Lotus will likely have trouble resisting IBM’s premium-priced offer, which was 85% above Lotus’ $32.50 closing price on Friday.

“There’s going to be a lot of pressure on Lotus’ board to accept this offer,” said Stephen Willard, a former acquisitions expert with First Boston, which is representing IBM in its bid for Lotus.

“It’s all cash and it’s not contingent on any financing,” Willard continued. “IBM is paying a premium to push out any potential counter-bids.”

Lotus’ board must convene within the next 10 days to consider IBM’s proposal, and, should it choose to reject it, to set in motion a plan to resist it.

One of its options is to invoke a “poison pill,” which would flood the market with new shares and make the acquisition prohibitively expensive. Lotus’ home state of Massachusetts also has anti-takeover legislation that could be invoked to block IBM’s bid. IBM has begun legal action to overcome those defenses.

A third possibility is that the U.S. Justice Department will oppose the deal on the grounds that it violates antitrust laws--as it did in the case of Microsoft’s proposed acquisition of Intuit Inc. However, legal experts said it is unlikely that IBM--which has been a dismal failure in PC software--would rouse the Justice Department to such action.

Still, hostile takeovers have been a risky proposition in the computer industry. AT&T;’s hostile takeover of NCR Corp. in 1991, which united two companies with wildly different corporate cultures, is seen as a failure. And in the software industry, where a company’s greatest assets are its employees, the chances that a hostile takeover will be successful are even slimmer. Under the best of circumstances, merging staid IBM and free-wheeling Lotus would be difficult.

Whether the acquisition remains a hostile one will likely be up to Manzi, a strong-willed, often-criticized executive who dominates the company board. His reluctance to accept IBM’s lucrative offer raised more than a few eyebrows in the computer business, where Manzi--a one-time journalist--has long been held in low esteem.

During Manzi’s watch, Lotus lost its lucrative franchise in spreadsheets. Notes revenues have failed to compensate for the rapidly declining sales of Lotus 1-2-3. The company surprised Wall Street last quarter by reporting a $21.3-million loss. A painful restructuring, including layoffs, has followed.

“Morale is very low,” said Jeffrey Tarter, editor of Softletter, an industry newsletter. “This may be the first case where the employees open the gates to let in the invader.”

Lotus founder Mitch Kapoor on Monday broke a long silence about the company, saying a takeover is unfortunate.

“For me, it will be very sad if Lotus loses its independence and autonomy, a very sad day,” he said. “This is the likely end of an era.”

IBM said it would allow Lotus to operate as a separate company, which many believe would be critical to the acquisition’s success.

“The risk in these things is that you lose the people and IBM knows that,” said a source close to IBM. “Even then, these sort of things are tough. IBM’s record for doing these things well has been, to put it politely, checkered.

“If they make this work, it will be one in a row,” the source said. In the mid-to-late ‘80s, IBM acquired a number of small PC software firms. Few proved successful as IBM suffocated those companies through over-management.

It is unlikely that Manzi would stay to run an IBM-owned Lotus. “Jim has probably worked closely enough with IBM to know that he couldn’t work for the company,” the source said. “He’s not the kind of guy whose going to take walking orders from Armonk [IBM’s headquarters in New York].

“I would hope that they will hire a non-IBMer to replace Manzi,” he said. “This isn’t going to work with John or Jill IBM.”

* WHAT IT MEANS: How bid affects software industry, key players. D1.