Lawson – Issues on two fronts: Earnings and Icahn

Today, Lawson Software (LWSN) announced earnings below analyst expectations. Specifically, profits of $2.6 million were reported (vs. year earlier number of $8.6 million) resulting in a 2 cents/share profit. Analysts were expecting something closer to 11 cents. Revenue was up overall. The market didn’t appreciate this news.

Lawson, in the words of television character Ricky Ricardo, has ‘some splaining to do’. Corporate raider/investor Carl Icahn has taken an 8.5% stake in the company. Carl has targeted many other firms in the past including the late TWA. Carl used to be a big advocate for unleashing the value locked up in some companies. What that often meant was that some company’s parts were worth more than the whole.

Mr. Icahn will likely want to see Lawson’s stock price improve. He could suggest the following changes too:

- Spin off the Intentia software business. Proceeds from this sale could be used for a special shareholder dividend. - Sell off the core Lawson ERP business. - Scale back additional R&D expenditures - RIF more Lawson employees - Etc.

Any of those moves would be designed to increase short-term cash flow and hopefully raise Lawson’s stock price for a while. Would these be good moves long-term? I’m not so sure.

Mr. Icahn could also suggest a housecleaning of Lawson management and/or its board. With his own team in place, Mr. Icahn could implement wealth creation strategies with a freer hand.

Mr. Icahn could also use the current earnings results to increase his stock position in Lawson. The greater his holdings, the more board seats, etc. he can control.

Lastly, Mr. Icahn could force the firm to assume debt and/or go private. While this would resemble a private equity move, it would let the company do more side deals without SEC scrutiny. What could those deals be? Well, the company could acquire some SaaS vendors and re-make Lawson’s market relevance in this space. Or, the company could be acquired/merged into another ERP provider although this seems unlikely at this time. Or, the company could become another ERP consolidator.

Loading up the company with debt is something leveraged buyout and private equity firms do. They take a company private using borrowed money while protecting their equity investment with a preferred class of stock. This plan works when the acquired company can be re-sold in a couple of years at a profit. However, if the company can’t meet its debt servicing costs, the whole enterprise can be lost.

If I were a software shopper, I’d want to have a long, considered conversation with Lawson executives before doing a deal with them. I’d also want to construct into any contract a number of protections should the company experience a material change of control. Software companies that experience slow growth, may have leadership changes or face merger/acquisition threats are companies that may develop product development direction changes that are not what buyers originally expected. These are interesting times for Lawson and interesting times dictate one take special care.