This week's dramatic departure of the top management at Mercury Interactive has been well received by analysts as a positive step, though implications of the stock options scandal have left an overhanging cloud of disconcert over the company's shares and its long-term potential.
On Tuesday, three top executives at Yehud-based Mercury Interactive, including chief executive and chairman Amnon Landan, resigned from the company after an internal investigation showed they benefited from irregularities in the granting of stock options.
Shares plummeted more than 30 percent to $24.33 on Nasdaq following the news but on Thursday had bounced back to $26.20.
Citing a thick cloud of uncertainty, which was not expected to be resolved in the short-term, RBC Capital Markets cut its rating on Mercury shares to "underperform/speculative"from "market perform." Analyst Robert Breza said that although the management change was a good thing, "the investigation into stock options misstatements at the top is alarming with the potential that additional accounting errors may be found." He lowered his 12-month price target for the shares to $28 from $41.
Mercury, which develops software that helps companies test, manage and integrate business applications, appointed a special committee to conduct the probe in June in response to an inquiry initiated by the Securities and Exchange Commission in November 2004.
Against analysts' consensus, Shaul Eyal at CIBC World Markets said he sees long-term potential for Mercury because of its dominant position in the software market, once it has restated its financial reports for 2002 to 2004 and once the probe is over. He believes upheaval at the top and the company's dominant market position make Mercury an attractive acquisition target.
Analysts at William Blair & Co., meanwhile, agreed that Mercury has a strong installed customer base and excellent products with wide market reach but it slashed its rating on the shares to "market perform" from "outperform," saying the share price may drop before it goes higher given the lack of visibility on how recent announcements will affect business growth. Mercury warned of a "challenging" fourth quarter, although it didn't provide specific guidance. William Blair also views Mercury as a potential acquisition target citing IBM or Hewlett-Packard, which could both sell the company's products across their large customer base, as possible buyers.