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Vinny’s Holdout

Smith: drew line on a share

Quest Software Inc. Chief Executive Vincent “Vinny” Smith made a $200 million stand at the Fairmont Newport Beach.

That’s where he dug in on a $28-a-share price on the sale of Quest, delivering the message to Dell Inc. software division boss John Swainson and mergers and acquisitions head Dave Johnson.

Smith drew his line in early June, amid a bidding war for his Aliso Viejo-based company.

It worked, reaping an extra $200 million for Quest shareholders when a final deal with Dell was sealed a few weeks later, according to knowledgeable sources.

It was a long road, and Dell wasn’t an obvious buyer when Quest first went on the market in March.

“Vinny did not start the go-private process with the intention of having a strategic buyer like Dell purchase Quest,” a source with knowledge of Smith’s thinking said.

Quest makes software that manages and improves on other business products from Microsoft, IBM Corp. and Oracle Corp. The company is one of Orange County’s biggest software makers with about $857 million in 2011 sales. It has 3,900 workers overall, about 600 here.

Prospects

Quest’s track record and prospects were enough to draw interest from private equity investors as well as strategic buyers such as Roundrock, Texas-based Dell, which aims to diversify from its traditional core of computers.

The bidding for Quest started in March when New York-based Insight Venture Partners offered $2 billion, or $23 a share. The offer called for Smith to roll in his 34% stake in the company and stay on as boss.

It also came with a 60-day “go-shop” period.

Quest hired Morgan Stanley as an adviser, and the investment bank eventually contacted 38 potential financial buyers and 17 strategic buyers, during the go-shop period under the direction of a special committee of its board. Twenty-three signed non-disclosure agreements, and nine potential buyers got deeper into the process, according to sources.

Dell was among the leading prospects, and a number of its executives spent several weeks in April and May on due diligence requests and meetings with their counterparts at Quest.

Dell made a $2.l5 billion offer—$25.50 a share—in mid-June.

Insight then joined with San Francisco-based Vector Capital to up their offer to $2.17 billion, raising the stakes by 25 cents a share.

The Insight-Vector offer would be financed with $364 million in cash, with the two private equity firms each accounting for half the total. Smith would roll over of at least 84% of his shares, and J.P. Morgan Chase Bank N.A., RBC Capital Markets and Barclays Capital would provide about $1.2 billion in debt financing.

Dell’s bid was cash, and included the purchase of Smith’s stake.

Quest issued a press release on June 20 disclosing that it had entered an amended agreement with Insight, and that Dell’s prior bid was no longer a “superior” proposal.

The computer maker came back a day later with an offer of $2.2 billion, or $27.50 a share.

Dell was a relative stranger to Smith, who had been an investor at Insight and counted other links to the private equity firm (see OC’s Wealthiest entries, starting on page 31).

Quest and Insight share a history that dates to at least April 1999, when the private equity firm’s cofounder, Jerry Murdock, joined the software maker’s board.

Insight was also one of Quest’s first investors, purchasing $5 million worth of shares. And Quest had acquired a number of companies from Insight in the last decade.

Dell’s offer wasn’t enough for Smith—but the deal wasn’t in his hands.

• Headquarters: Aliso Viejo

• Business: software maker

• Founded: 1987

• Ticker symbol: QSFT (Nasdaq)

• 2011 revenue: $857.4 million

• Recent earnings: $2.7 million for Q2

• Market value: about $2.4 billion

• Notable: Chief Executive Vincent “Vinny” Smith refused to budge on $28-a-share price

Special Committee

The special committee assessing the bids consisted of three independent directors:

• John Dirks, who spent 40 years at PricewaterhouseCoopers LLP before he retired in 2005.

• Kevin Klausmeyer, finance chief for Everyones Internet Inc., a Houston-based company that offers Web-hosting and email services.

• And Augie Nieto, founder of exercise bicycle maker Life Fitness and chairman of Minnesota-based Octane Fitness.

The special committee met on June 22 with representatives of law firm Potter Anderson & Corroon LLP and Morgan Stanley to discuss Dell’s latest proposal. A meeting two days later included David Cramer, Quest’s vice president, general counsel and secretary; Chief Financial Officer Scott Davidson; and representatives from Potter Anderson, Morgan Stanley and Quest’s legal counsel, Latham & Watkins LLP.

Potter Anderson informed Insight the next day that Quest had received a superior proposal from an “unnamed strategic buyer.”

The offer was received but not necessarily accepted.

Smith’s representatives told Dell that he still wouldn’t support an offer of less $2.4 billion, or $28 per share. The price equated to a premium of almost 50% from when the first bid for Quest became public in March.

Hardball

Smith played hardball the next two days, refusing to budge on the $28 target he first laid out at the Fairmont, according to sources with knowledge of the discussions.

Dell increased its offer price to $28 per share in exchange for Smith’s vote.

Insight quickly bowed out of the bidding war, and on June 30 Quest’s special committee recommended the Dell offer to the company’s board and shareholders. Smith, Quest and Dell executives signed the agreement that day.

An announcement hit the wires in California at 5:30 a.m. on July 2, announcing that Quest had terminated its agreement with Insight and was set to be acquired by Dell, the world’s third-largest computer maker, for nearly $2.4 billion in cash.

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