There’s Something About SumTotal

Why is a standard software services business suddenly the most coveted company around? SumTotal Systems last month agreed to sell itself to Accel-KKR, but yesterday received a competing bid from Vista Equity Partners, a firm that’s already had past offers dismissed.

The whole process seems like a relic of frothy M&A time gone by, and in a way, it is: The battle to win SumTotal started in April of last year.

After digging through this behemoth proxy statement, I learned that Vista and Accel-KKR have jumped through no shortage of hoops to bed SumTotal. After more than six months of meetings, Accel-KKR offered to buy the company for $7 per share, then $8 per share, then finally back to $7 per share in the fall of 2008 (just after Lehman Brothers collapsed). Even though SumTotal’s M&A Committee recommended the deal, the company’s board said no thanks.

Simultaneously, Vista Equity had its offer rejected by SumTotal’s CEO without any board consideration (pricing wasn’t provided in the filing). Once the stock market began to tank, Vista bought 11.4% of the company’s public equity at $4.20 per share. Meanwhile, SumTotal had entertained strategic buyers, and two unnamed players — “Party A” and “Party B” — were lurking behind the scenes with their own offers.

All this culminated in the recent bidding war. Vista made a new offer at $3.25 per share. SumTotal then entered into a definitive merger agreement with Accel-KKR at $3.80 per share. Yesterday Vista topped its price by around $20 million to $4.50 per share. As it stands, the company has yet to respond to Vista’s offer, which is greater than the $4.20 share price it paid for its minority stake.

Meanwhile, the proxy doesn’t tie up loose ends on “Party A,” which very well may be preparing its own bid. The unnamed firm or company placed a preliminary offer of $6 a share back in May 2008, signed a confidentiality agreement in April 2009, and submitted a revised IOI of $3.75 per share directly thereafter. That bid was placed alongside Vista’s $3.25 offer and preceded Accel-KKR’s $3.80 per share offer, which ultimately led to the deal agreement we saw late last month.

Will this thing continue to escalate? Vista clearly wants to get it in the bag ASAP. The firm’s offer letter expresses “increasing concern about the amount of time being consumed by this process.” The terms in Vista’s offer are essentially no different than SumTotal’s agreement with Accel-KKR, the letter states. Working in Vista’s favor are two investor groups, Discovery Group and Lion Eye Capital, that have sent letters to SumTotal’s board recommending Vista’s offer. Other shareholders must agree, as the stock has traded very closely to $4.50 per share since yesterday.

But given the level of Accel-KKR’s prior offers and the unknown “Party A” variable, I don’t expect this situation to end anytime soon. Even if accepted, Vista’s offer has a go-shop provision and no break-up fee. Several analyst reports say the stock is worth $5 per share. They expect increased bids in that range, saying SumTotal’s board would prefer a sweetened deal from Accel-KKR, the firm it’s already approved a deal with.

Well, Accel-KKR, or “Party A,” whoever you are, it’s your move.