MSC’s long road to M&A

There’s few things more entertaining to me than a good merger proxy. And when that merger proxy is filed late on a Friday as this one by MSC Software (MSCS) was, it’s a pretty safe bet that there’s something interesting inside. Yet another reason why we love the Friday night dump!

First, in the interest of full disclosure, I have a small position in MSCS that I bought awhile back because I was convinced that it was a takeover candidate. Unfortunately, it took until this past July to prove me right and it didn’t come close to the premium I was expecting. Apparently, I’m not alone in my disappointment, because a group called the Shareholders Foundation has filed a class action suit.

But back to the filing and what made it so interesting: MSC has apparently been shopping itself around since early 2007, though it didn’t get very far. Then, in February 2008, Friday’s filing discloses for the first time that it received a letter from Jesse A. Cohn a portfolio manager at Elliott Associates on Feb. 25, 2008 that said this:

With less than $250 million in annual revenue, MSC is subscale and at a significant competitive disadvantage. This disadvantage stems from: i) less robust sales resources than its competitors (consider the recent difficulties in finding proper product distribution); ii) a far narrower product line (inability to package CAE along with a logical complement such as CAD or PLM); iii) fewer R&D dollars (larger competitors are funding the development of competitive solutions); iv) far weaker customer service and support, two areas of growing importance; and v) lesser —incumbency with large corporate customers.

At the time of the letter, Elliott owned 7.4% of the outstanding shares and expanded that to 9.2% by May 2008 and over 13% by February 2009. While Elliott had been filing Schedule 13Ds, the letters between Elliott and MSC were not made public until Friday’s filing. During this time, multiple companies were interested in MSC — all at prices above the takeover price.

It may not qualify as beach reading but the “background of the deal” has enough plot twists to qualify as one of the better merger proxies I’ve read.