Selling the Company

But screw your courage to the sticking-place, and we’ll not fail.
—William Shakespeare, Macbeth

In my last post, I described how, at Opsware, we would step back from the fray about once a year to go through a strategic review of our situation with the board. In November 2005, our conclusion was to keep on building an independent company, but in early 2007 another review led us to a different conclusion. Our business was strong, but meeting quarterly expectations was difficult and the market wasn’t rewarding us for the growth and leading market position we had achieved. We were at a decision point: Plow even more money into R&D and sales expansion or explore a sale. We decided to explore a sale, but only if we could achieve a top-dollar price for our shareholders.

The dance begins: May 2007

Our February update meetings with the major enterprise IT players had piqued their interest and led to several follow-ups.  The key was to get someone to set an initial price. On May 22, we went back to the Opsware board with an update. A company we’ll call Company 1 had just offered to buy the company for $11/share. That was a 38% premium—good, but not exceptional. Once again, we discussed the opportunities, risks and shareholder value implications of continuing in the business. We debated long and hard: What was our number?

We decided to send a strong message to anyone considering us as a target: We told Company 1 that the Board had rejected its $11/share offer and would not give serious consideration to any new offer below $14/share. For good measure, we took the opportunity to notify the other companies who’d followed up with us (HP and several others) that we’d received an offer but were not interested in discussing any deal below $14. Since that was a 75% premium over our current price, Company 1, HP and everyone else told us they were out. We sent all of them letters requesting the return or destruction of any information we had shared. Those brief dreams of exit seemed to be just that—dreams. We went back to the slog of making yet another quarter.

Then, almost a month later, the CEO of Company 1 came back offering $13.25/share. Yes! We were getting close to our magic number! We reconvened the board for a serious, fact-based discussion of staying the course versus selling in this price range. Our analysis suggested we would have to grow revenues at least 75% annually to exceed $15/share. That seemed impossible—Wall Street consensus was 28%.

In addition to upside opportunities, we discussed the risks of staying standalone. (Note #6, macroeconomic slowdown: We had no idea how real a risk that would turn out to be just months later.)

It was clear: We should exit. We decided to stick to our guns and drive for a deal at $14/share, leveraging competition and urgency to get there. The first step was to get Company 1 to $14, which we did two days later. Then we notified the others, notably HP, that we had an offer at $14. A whirlwind of meetings and calls followed with the various contenders.

While we had discussions with 10 companies, by July 18 it became a two-horse race between Company 1 at $14.05/share and HP at $14.25/share, each acutely aware of the other’s interest. To keep up the pressure, we negotiated detailed agreements with both in parallel right up to the end, with a real prospect of getting to $15 or more. Although exhausted, we were on a massive emotional high—this was going to be a fittingly impressive end to an eight-year odyssey!

Crisis strikes: July 18

Then, with 24 hours to go, we had an inconceivably ugly crisis. In diligence, Company 1’s auditors, Ernst and Young (EY), challenged the way we had accounted for three customer contracts, despite the fact that EY was also our auditor and had ordered this accounting. Unbelievably, two regional offices of EY were disagreeing with each other. Called to arbitrate, the national office sided with Company 1’s regional office and informed us we would have to restate our publicly-filed financials for the past several years! While the issue was entirely technical and the amounts immaterial, the prospect of a restatement was horrifying. Not only had our glorious deal suddenly vaporized, but by chasing it we’d triggered something that might panic investors and cut our stock price in half. In the blink of an eye, our likely outcome had plummeted from $15/share to maybe $4/share. We were devastated.

Company 1 was seriously spooked and asked for a couple of days delay. We knew we’d have to tell HP. We put the best face we could on it—“technical issue, immaterial amounts, no impact on value, etc.”. Hearts in our mouths, we waited for their reaction. To our intense relief, they reacted with concern but didn’t walk. However, our leverage was gone and our deal seemed on the brink of collapse.

Our only hope was to get the three customers to agree to a minor change in their contract language that would enable the original accounting treatment. Theoretically possible, but we were almost out of time, and these were huge corporations. Working through the night in a hot stuffy conference room, we started emailing and calling our executive contacts. Unbelievably, in a testament to the strength of our customer relationships, all three mustered their attorneys and got it done in 24 hours. Restatement avoided! We were back on track—but with only one bidder currently left at the table. Could we still get it done?

Psych test: July 19

Perhaps sensing advantage, HP execs suddenly dropped their offer to $13.75 in a tense 3 pm meeting the next day with Ben and me in their executive offices. We were furious, but we had come this far and we had no other live bidder. Maybe we should just suck it up and accept that EY’s ineptitude had cost us a few hundred million dollars?

Then, thinking on the fly, we realized it wasn’t that simple. How we reacted would be critical, not just to the deal price but to the very survival of the deal itself. Anything less than an unequivocal rejection would signal to them that they were in the driver’s seat. If we were now willing to accept $0.50 less per share, then why not $1 or $2 or $3 less? If there was really no one else at the table, why not drag out the process and wear us down? After all, this was a very expensive deal—why not terminate and restart at a much lower valuation?

We knew HP was the only one currently at the table, but they couldn’t be sure of that. We knew it was time to “screw our courage to the sticking-place”. We informed them that we had scheduled a final board meeting for 6:30 pm and we would not be recommending the deal with HP for anything less than the original price.

With Company 1 still AWOL and no word from HP, we started the board meeting. What the hell were we going to tell the board? Had we killed our deal over 50 cents a share?

We needn’t have worried. By 6:35 pm, my cellphone was lighting up with calls from HP’s M&A guy, worried they were about to lose the deal. We made him wait. When I finally called him back about 7 pm, he told me they were willing to offer $14.05. Ha! Although some board members and fellow execs strongly urged us to take it, we resolved to go back for the final 20 cents as a matter of principle and to preserve the crucial psychology of a hard-won deal. Fifteen minutes later, we had an agreement to sell Opsware to HP for $14.25/share in cash. We were drained, but elated. Our eight-year journey was at an end.

In summary

Although we never built Opsware with the intent of selling it, acquisition ultimately turned out to be the best outcome for our shareholders and our employees. While the company was clearly an attractive target, the significant premium we achieved in the sale was also the result of the company’s ongoing investment in strategic business development and a tightly executed deal process. And in knowing where the exits were.