Opsware Burns Short Sellers After Takeover Pushes Shares Higher

Aug. 24 (Bloomberg) -- Opsware Inc., the data center software company formed by Internet pioneer Marc Andreessen, hammered short sellers who dismissed speculation the company would be acquired.

Wagers that shares of Sunnyvale, California-based Opsware were overvalued climbed each month this year and reached 25 percent of the company's stock in July. The short sellers, who sell borrowed shares and hope to replace them at a lower cost, got burned July 23 when Hewlett-Packard Co. agreed to buy Opsware for $1.6 billion in cash, spurring a 36 percent rally.

``It's almost the norm now that if you're a small software company with a good franchise, you'll get bought,'' said Kevin Landis, whose San Jose-based Firsthand Technology Value Fund beat 95 percent of its peers this year. ``It should have made people think twice about shorting it.''

Opsware's gain last month was the second-biggest among Nasdaq Stock Market companies whose short interest was above 10 percent, behind Emcore Corp., according to exchange data as of July 10. Short sellers dismissed recommendations by Deutsche Bank Securities analysts to buy the shares on expectation of a takeover. Andreessen, the co-founder of Netscape Communications Corp., sold his company to America Online Inc. for $4.2 billion in 1998.

`Strong Likelihood'

Abhey Lamba, an analyst at UBS Investment Banking in New York, said on July 10 there was a ``strong likelihood'' of an acquisition. Opsware stock traded at 63 times estimated 2007 earnings at the beginning of the year and climbed to 91 times profit before the acquisition was announced, according to Lamba.

``If you didn't believe the company would get acquired, you could make the case to go short because it went up so much,'' Lamba said in an interview. ``But it was the obvious leader in a high-growth market.''

The company founded in 1999 makes software that manages data centers for more than 350 clients, including JPMorgan Chase & Co. and Target Corp. Andreessen, Opsware's chairman, helped develop the first Internet browser and was technology chief at Netscape.

The number of U.S. software company mergers fell 9.8 percent to 83 in July, the slowest pace of the year, after a rise in credit costs sent the Nasdaq Composite Index down 6.8 percent from a six-year high. That was less than the 29 percent decline for real-estate industry takeovers and 15 percent for the media industry, data compiled by Bloomberg show.

Cash Deals

Acquisitions of technology companies weren't slowed as much by the climbing credit costs from subprime mortgage defaults, said Jim Oberweis, president of Oberweis Asset Management in Lisle, Illinois.

Takeovers of computer-related companies tend to be ``cash deals,'' said Oberweis, who owned more than a million Opsware shares as of June. ``The subprime credit crunch is going to slow down debt-funded deals. It's not going to slow down cash.''

Starting in September, the NYSE and Nasdaq will report short interest data every two weeks, instead of once a month.

Following are the shares with the highest short-interest that rose or fell the most:

Alexion Pharmaceuticals Inc. (ALXN US) gained 21 percent after traders shorted 25 percent of its shares. The Cheshire, Connecticut-based company's revenue climbed to $9.76 million in the second quarter, Alexion said in a July 25 statement. That beat the average estimate of $4.34 million in a Bloomberg News survey of five analysts.

Pharmion Corp. (PHRM US) climbed 30 percent after 17 percent of its shares were sold short. Pharmion shares had the biggest gain on Aug. 2 since they began trading in 2003 after the Boulder, Colorado-based company said its treatment for a deadly bone-marrow disease helped patients live longer. The injectable treatment, Vidaza, extended survival by 74 percent in a study of patients with higher-risk myelodysplastic syndromes, in which blood cells in bone marrow don't function normally, the company said.

Impac Mortgage Holdings Inc. (IMH US) dropped 64 percent after 35 percent of its float was sold short. The Newport Beach, California-based home lender posted a loss of $2.05 a share in the second quarter, compared with a profit of 30 cents, it said in an Aug. 14 statement. A week earlier, Impac disclosed that it suspended loans to people who fall short of qualifying for prime credit.

Levitt Corp. (LEV US) declined 76 percent after 22 percent of its shares were sold short. The Fort Lauderdale, Florida- based builder of planned communities including Levittown, New York, fell as much as 30 percent after BFC Financial Corp. canceled plans to buy it on Aug. 15.

To contact the reporter on this story: Alexander Ragir in New York at aragir@bloomberg.com

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