Eric Lai

Why John Chen should fear a boardroom battle over Sybase

By Eric Lai
January 04, 2008 6:19 PM EST

As an experienced tournament bridge player, it's no surprise that Sybase CEO John Chen is playing his cards close to the vest against Sandell Asset Management, the billion-dollar Wall Street hedge fund and holder of 6% of Sybase's stock that is breathing down his neck.

The question is: is Chen bluffing, or is he willing to get into a messy proxy fight with a rebel shareholder in order to keep his authority - and Sybase - intact?

I first met Chen a decade ago, when I was tech editor at the South China Morning Post in Hong Kong, and he was the newly-appointed 40-year-old CEO tasked with turning around Sybase.

I liked Chen's plan to take Sybase away from the fruitless labor of competing head-on against Oracle and Microsoft in the database arena and expand into related businesses. But what impressed me more about Chen was how hardworking he seemed. Chen came through Hong Kong on his way to China, where he helped build what is today a large customer base. Chen came through town so often that I actually started turning down offers from his PR team to meet him (no offense, John! I just ran out of things to ask ya).

Now approaching his 11th year helming Sybase, Chen's tenure can be applauded except for two things: a lack of strong revenue growth, and the pulling of Sybase's sponsorship for the San Jose Open tennis tournament in favor of a golf tournament (just kidding).

When Sybase reports Q4 earnings on January 24th, it is expected to announce 2007 revenues of $1.02 billion, topping its 2000 revenues for the first time. Only Sun Microsystems Inc. comes to mind as having the same trouble climbing back to its dot-com peak.

Chen's more than aware of that. During a lengthy Q&A interview I did with him three years ago, Chen said he would feel unsatisfied - and unable to leave Sybase - until "I see very solid, consistent growth…whatever the growth in the industry is, we should be able to outpace that for two to three solid years."

Those words might be haunting Chen now that Sandell is here to hold him to them.

So why should Chen fear Sandell? For one, Sandell is well-resourced. According to the Washington Post, the hedge fund has $7 billion at its disposal.

Sandell's founder, Thomas E. Sandell, is an experienced "activist investor" with a history of making companies bend to his will. Now, calling Sandell an "activist investor" makes him sound like a sign-carrying college student who daytrades on his Blackberry while he marches. Sandell's modus operandi is to take significant stakes in troubled or underperforming companies and push the executives to accept his advice for raising its stock price.

What's good for a shareholder isn't always good for the long-term health of a company. Take Web directory provider, InfoSpace Inc. After InfoSpace fell into trouble last year, Sandell swooped in with his 9% stake and demanded management immediately give back HALF of its $400 million cash to shareholders in the form of a special dividend, as well as hire a financial adviser to evaluate a potential sale. Management acceded to his wishes.

Another high-tech firm, Minneapolis financial software maker, Fair Isaac Corp., also gave in to Sandell's demands, as did ketchup maker, H.J. Heinz Co. So it's doubtful Sandell is intimidated by Sybase one bit.

Sometimes Sandell's tactics go too far. In October, the SEC fined Sandell $8 million for improperly shortselling the stock of a New Orleans bank, Hibernia Corp., in the immediate aftermath of Hurricane Katrina.

Sybase remains a solidly profitable firm that has, in the past several quarters, delivered double-digit year-over-year revenue growth.

Maybe that's why Sandell has been, by its standards, unpushy. Rather than demanding one course of action, it is suggesting three alternatives. None are probably particularly palatable to Chen. Staying intact but buying back $1.5 billion in stock to raise its share price would saddle Sybase with $1.1 billion of debt.

Spinning out for an IPO Sybase's fast-growing mobile software divisions, iAnywhere and Sybase 365, would remove the heart of Sybase's 'Unwired Enterprise' strategy - though Terry Stepien and Marty Beard, presidents of iAnywhere and Sybase 365, may secretly welcome it.

Putting Sybase up for sale, which Sandell thinks could net as much as $3.7 billion, is also not in Chen's DNA.

"If Oracle came with respect and enough money, I would have to take their offer into serious consideration," Chen told me in 2004.

"But I would not welcome an offer," he continued. "I'd rather be buying lunch than being lunch…We don't need anyone else."

So I eagerly await Sybase's January 24th conference call (webcast starts at 10:30 am ET/7:30 a.m. PT here) to see if Chen reveals if and how Sybase is going to keep treating - or be someone else's treat.