Lee Roberts, who started seeking buyers for FileNet Corp. more than a year ago, will see his patience rewarded with a compensation package of $24 million when the software company becomes part of IBM Corp.
In August, Big Blue said it’s paying $1.6 billion for FileNet, a maker of software to manage various files on corporate networks.
Roberts, chief executive of Costa Mesa-based FileNet, is set to land much of his pay in stock options and grants that’ll be cashed out when the buy is finalized, according to a recent filing with the Securities and Exchange Commission.
Other executives are set to see millions of dollars in compensation as well.
The latest filing also sheds more light on the reasons and details behind the deal. It shows Roberts and IBM were driving a hard bargain before a pact was finalized.
Another insight: A sort of bidding war raged among a handful of companies in the days leading up to the deal announcement.
FileNet is among several sellers of content management software, including EMC Corp. and Canada’s OpenText Corp.
Enterprise content management software is used to find, sort and retrieve documents and files, including Word documents, PDFs and e-mails.
FileNet has gone a step further, folding in what’s called business process management software,essentially culling data to automate and speed up transactions such as mortgages.
The company’s software package, called P8, now makes up about 90% of FileNet’s sales and puts it among the top four players in the market.
Executive Payout
Roberts’ payout comes from a handful of sources, according to the filing.
A big piece stems from a FileNet compensation package approved earlier this year. FileNet directors, taking the cue from other companies, shifted more stock compensation away from options and toward stock grants.
Under the program, which gained shareholder approval in June, Roberts received 270,000 restricted stock grants that were set to take effect in the next few years.
The grant is “performance based.”
With the IBM buy, three-fourths of the stock grant is set to be cashed out, giving Roberts $7.1 million. The other fourth is set to convert to IBM stock grants with a value of $2.4 million.
Combined, the value is about $9.5 million, about $1 million more than when FileNet made the grants.
Roberts also has 42,500 restricted stock grants that weren’t explicitly based on performance. They’re set to be cashed out at a value of $1.5 million.
The other big payout is set to come from the cashing out of stock options that were awarded in prior years. They’re valued at $8.4 million. Roberts has more than 600,000 options.
Some future incentives are laid out for Roberts, who’s set to stay on at FileNet after the acquisition. He’ll receive a maximum of $3 million “based on the degree to which the milestone targets” are met.
Then there’s a “special bonus” of nearly $2 million that takes the place of a payout from change in control agreements.
The filing also talks about Roberts’ salary.
He is set to receive the same base salary, $573,000, and incentives as he would have from FileNet. They total nearly $1 million.
Sam Auriemma, chief financial officer, lands a package of more than $11 million, including incentives and vested stock awards.
President Ron Ercanbrack is set to receive more than $10 million.
Blow-By-Blow
The latest regulatory filing gave a near blow-by-blow account of the days leading up to the acquisition announcement.
FileNet said it had “periodically reviewed” its business strategy. The rapid rate of consolidation in the software industry made FileNet’s competitive position increasingly precarious, according to the filing.
The sale idea got serious attention in late 2004.
“A potential sale of the company was considered because of, among other things, the risks associated with continuing to operate as a stand-alone software company,” FileNet said.
In 2005, FileNet hired an investment bank to find potential suitors. The company chatted with three companies, including IBM.
Directors and management said there wasn’t enough interest at the time and told the investment bank to quit looking in May 2005.
Then on May 22 of this year, an IBM representative called Roberts, who worked for Big Blue earlier in his career.
No details were given on the conversation.
Roberts then called a board member. On May 28, the company had a non-disclosure pact in place with IBM.
More meetings with IBM ensued. FileNet wanted to make sure the bid price was right. It asked Merrill Lynch & Co. for some help in June.
A big meeting with IBM came on June 22 when Big Blue “provided an indication of a potential valuation range for our common stock of $32 to $34 per share.”
The stock closed at $25.83 that day. The final price ended up at $35 per share.
Five days later, Merrill Lynch told IBM that FileNet’s view of an appropriate valuation range “was higher than the range previously indicated by IBM.”
IBM said it needed to finish the results of its due diligence work before responding.
Other Suitors
FileNet then reached out to a couple of large technology companies, which it didn’t identify. Both showed interest, according to the company.
On July 17, a representative from one of those companies called Roberts to set up a meeting. On July 20, a representative from another potential suitor gave Roberts a call.
Meanwhile, IBM continued its research into FileNet.
On July 26, FileNet brought in a third potential buyer. The three companies and IBM were the only four likely to be interested in buying at the high end of the valuation range, the company said.
The next day, one of the buyers dropped out. The following day, IBM upped its offer a bit saying it could pay in the upper range of $32 to $36, but not the “top of that range.”
On Aug. 3, one of the potential buyers said it could pay $36. By the following day, FileNet delivered a draft deal pact to the interested suitor.
Trading in the stock became heavy. FileNet said it wanted to wind up the process by Aug. 9.
In the meantime, some FileNet officials worried about a termination fee and a “force the vote” provision by IBM.
On Aug. 9, the most serious potential buyer besides IBM said it would need more time to finalize an offer at $36 a share.
FileNet didn’t want to extend the deadline. Roberts did ask IBM for $35.25 a share. But Big Blue wouldn’t budge, keeping the price at $35.
The board then approved the IBM offer. The next day the news hit Wall Street.
Investors, who early on bid the stock above $36 after the IBM deal was announced, since have sent the shares back down to near $35 in recent days, effectively ending speculation of a bidding war.
