NEW YORK -- IBM formally began its hostile tender offer for Lotus Development Corp. yesterday and moved to replace Lotus' board of directors with three new directors of its own choosing.
Meanwhile, shares of Lotus Development inched higher as the company's chairman, Jim Manzi, huddled with Wall Street advisers to consider alternatives to IBM's surprise bid to take the company over for $60 a share.
Wall Street traders, sensing a takeover at a price above the initial offer, pushed Lotus shares further above IBM's bid. The stock gained 37.5 cents yesterday, closing at $61.81. IBM shares also advanced, closing at $91.375, up 12.5 cents on the New York Stock Exchange.
The consensus on Wall Street seemed to be that the list of companies that might ride to Lotus' rescue with a counteroffer was dwindling quickly, increasing the prospect that Lotus will be forced to negotiate a friendly deal with IBM.
"There are no other players as far as I am concerned," said Stephen C. Dube, analyst with Wasserstein Perella Securities.
In its filings with the Securities and Exchange Commission, IBM once again strongly implied what its chairman, Louis V. Gerstner Jr., had hinted at a news conference Monday: IBM would sweeten its offer if Lotus agreed to negotiate a friendly merger. IBM said that if an agreement were reached, its all-cash bid might be replaced with a package containing a combination of IBM shares and cash. The chances that such a package would be worth less than $60 a share are considered extremely unlikely.
IBM's tender offer is contingent on Lotus withdrawing its "poison pill" anti-takeover defenses, which would make IBM's acquisition prohibitively expensive. As expected, IBM filed suit in Delaware, seeking to compel the Lotus board to revoke the poison pill.
Separately, IBM said it would obtain commitments of support from a majority of Lotus shareholders, giving IBM the right to dismiss the company's board and appoint a new board that would revoke the poison pill.
'A sensitive time'
Several investment bankers specializing in corporate takeovers said that it was only a matter of time before IBM would prevail in its efforts to overturn Lotus' defenses.
Barring an antitrust problem, that leaves Lotus with essentially two options: find another suitor more to its liking or negotiate with IBM.
"It's a sensitive time," one Lotus executive said.
Lotus has 10 days to respond to IBM's bid but may face pressures to act sooner. As long as the illusion of a potential suitor exists, IBM may be cajoled into raising its bid higher than it would if it became clear that Lotus had few alternatives.
But IBM also has a strong incentive to keep Lotus and the company's biggest asset, its program developers, happy.
"You want to make these kinds of deals as friendly as possible because they are so people-oriented," said a Wall Street executive who declined to be identified.
That could ultimately force the two sides to agree on a solution short of IBM swallowing Lotus whole.
Only a few months ago the two companies discussed a deal in which Lotus' declining desktop software applications business would be spun off into a subsidiary jointly owned with IBM.
The proposal then called for IBM also to buy a large stake in Lotus' remaining communications software business. Whether IBM would be willing to turn back the clock after mounting its takeover campaign is uncertain.
As speculation about potential white knights swirled throughout the computer industry and on Wall Street, the number of logical candidates appeared to diminish.
"This is a deal we'll definitely stay away from," Robert Frankenberg, chief executive of Novell Inc., a widely mentioned potential bidder, told Bloomberg Business News.
Other potential suitors include AT&T, Oracle Corp., and Hewlett-Packard. Representatives of all three companies declined to comment on whether they were interested in Lotus, but most analysts were skeptical.
AT&T, which has a joint marketing agreement with Lotus, could afford to buy the company, but several analysts said it was unlikely.
AT&T has been involved in several large deals in recent years, hurting its stock price.
Analysts said Oracle and Hewlett-Packard would both be unwilling or unable to outbid IBM.