As if due diligence wasn’t difficult enough, now there is the issue of whether firms properly accounted for backdating of options for executives. Backdating of options is not, per se, illegal so long as the company’s procedures were properly recorded, as we learn from a recent article by Steve Rosenbush in Business Week Online, August 1, 2006 (excerpt below). Firms that have had accounting problems have been acquired a lower price. Other firms with accounting problems are financially weakened to the point of becoming acquisition targets.
On July 31, computer-memory maker SanDisk (SNDK) announced that it would acquire smaller rival M-Systems (FLSH) of Israel for $1.35 billion in stock. From a strategic standpoint, it's a logical merger between two players in complementary businesses. Both companies make flash memory that stores digital images, music, and more. But SanDisk is known for removable cards, while M-Systems concentrates more on the memory that's embedded in wireless phones, MP3 players, and other devices [see BusinessWeek.com, 8/01/06, "Flash Free-for-All?"].
The deal stands out in another important respect, however. M-Systems is one of more than 60 companies that have been caught up in the ever-widening scandal over the backdating of options. In most cases, the companies awarded stock options to executives at advantageous prices, and they are now investigating whether the disclosure and accounting for those awards was proper.
Now, it looks like some of the companies involved in backdating may become takeover targets. M-Systems is the second company touched by the scandal in as many weeks that has agreed to be acquired. On July 25, computer giant Hewlett-Packard (HPQ) announced that it would buy software maker Mercury Interactive (MERQ) for $4.5 billion in cash [see BusinessWeek.com, 7/29/06, "Mercury's Star Rises"]. Before the deal, Mercury's shares had been in a prolonged slump, after the company had disclosed its own backdating issues and the departure of its chief executive.
