Wednesday, September 13, 2006

Calls of Note Part 2

- Merrill Lynch notes that a review of Open Text's (NASDAQ:OTEX) 10-K filing last night revealed an ongoing SEC review of its Annual Report and 10-K for FY05 and 10-Qs for the first three quarters of FY06 related to its method of accounting for acquisition related costs. The lack of detail and context of the disclosure are likely to resurrect investor concerns over lack of transparency given Open Text's acquisitive history.

The Hummingbird shareholder vote is September 15th, and despite management optimism, they continue to have concerns about the scale and scope as well as lack of clarity on integration plans. The deal introduces risk of unanticipated challenges that could easily upset the tenuous operational stability realized through painful retrenchment throughout FY06.

For now they remain sellers of the stock pending comfort into the viability of plans to integrate Hummingbird as well as evidence that the shift to partnership model is successfully offsetting declines in more mature product lines. Given recent strength in the stock, the specter of an SEC investigation could impair potential takeout prospects and further undermine investor confidence.

Maintains Sell rating.

Notablecalls: OTEX stock has had a nice run lately. It started about 10 days after Merrill switched their rating to Sell (July 6). That was about 20% below current levels. Anyway, I think Merrill's findings will cause some downside volatility. Hope it won't gap down huge allowing for a nice short entry.

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