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Smallworld: Has Flomerics found its white knight?

Created:
9 June 2008
Written by:
Malar Velaigam

Software engineering specialist Flomerics saw its shares a hit high of 112.5p as a new bidder declared its interest in buying the company. The newcomer is US-quoted Autodesk, and management hopes that the new bid will take the sting out of an increasingly hostile bid situation with another US-quoted software player, Mentor Graphics. If Autodesk does make a formal offer, things may get ugly, as Mentor appears determined to get its hands on Flomerics.

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Just to bring you up to speed, Mentor and Flomerics have been having a few exchanges lately as Mentor moves to try to win over investors with its 104p a share offer, and Flomerics has moved to defend itself.

It all began on 14 March when Flomerics saw Mentor - an electronic design automation company with market cap of around $1.1bn (£558m) - emerge as a significant shareholder when it acquired a 20 per cent stake from German investor Pricap.

Mentor Graphics followed this up with an unsolicited offer for the software engineering group, valuing it at 104p a share or about £24m, 9 on May. Flomerics' board promptly rejected the offer alongside a trading statement which painted a very bullish picture of its fortunes. The group stated that first-quarter trading had been strong with maiden profits of £0.34m on the back of 42 per cent increase in revenue to £3.6m.

A defence document was posted a day later, reiterating that Flomerics' management felt that the offer of 104p a share undervalued the company. But the situation became hostile as Mentor rode on to post its offer document to Flomerics' shareholders.

The document argued that the offer price - which includes the final dividend - represents a premium of about 19 per cent to the closing price of 89p on 8 May, which was the last market day before the announcement of its offer. Mentor also points out that Flomerics' shares closed at 50.5p on March 13 - the day before Mentor acquired its 20.1 per cent stake in the group.

The document continued to explain that the 20.1 per cent stake was acquired from financial institution Pricap, which at the time also had board representation through former director Wolfgang Biedermann. Mentor claims that due to this Pricap was "in a position to make an informed decision about the fair value of a Flomerics share".

Mentor also argues that Flomerics has painted a "superficially attractive picture" in regards to both the current and future trading prospects. Mentor has now clarified its statement regarding Mr Biedermann and stated that Pricap's decision to sell was made on the basis of publicly available historical information and that the price paid was based on book value. Mentor has also clarified that Pricap's decision to sell its stake was made without Mr Biedermann's knowledge.

Flomerics' board has reiterated its belief that the offer of 104p a share undervalues the company and has urged shareholders not to act on Mentor's offer in its announcements. Since the saga began, Flomerics' shares have more than doubled and are now trading well above the 104p level, suggesting that shareholders are expecting Mentor to be outbid.

It looks like the shares are fast approaching a peak. Although, historically, you never can tell the lengths a bidder will go to when things get hostile.

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