Mercury CEO, CFO resign in accounting probe wake

Company allegedly reported incorrectly the date of at least 49 stock-option grants

Three of Mercury Interactive Corp.'s top executives, including Chief Executive Officer (CEO) Amnon Landan, resigned Wednesday after an internal probe into stock-option grants resulted in a scathing report on their oversight of the software company's accounting.

A special committee of Mercury board members began investigating the company's accounting in June, following a U.S. Securities and Exchange Commission (SEC) inquiry about Mercury's option grants. The committee determined that over the past decade, Mercury incorrectly reported the date of at least 49 stock-option grants, almost always picking a date on which the stock price was lower than it was when the option was actually granted. Landan, Chief Financial Officer (CFO) Douglas Smith and General Counsel Susan Skaer all knew of the misdating and each personally profited from it, Mercury said. Each has resigned.

Mercury, which has headquarters in Mountain View, California, said in August that it would need to restate several years' worth of its financial filings. That process is still ongoing. Mercury hopes to file its restatement this month, but it warned that its ability to do so is "in serious jeopardy." If the restatement isn't completed by Nov. 30, the company risks being delisted by Nasdaq. For the moment, it's trading under a modified Nasdaq ticker symbol, MERQE. (Nasdaq appends an "E" to the ticker symbols of companies that are delinquent in filing quarterly financial reports.) Mercury's shares were down 32 percent in midday trading on Wednesday, at US$23.89.

To replace Landan, who joined Mercury in 1989 and became its CEO in 1997, Mercury promoted its president and chief operating officer, Tony Zingale. Zingale joined Mercury in late 2004 after serving as CEO of CRM (customer relationship management) software maker Clarify, which Nortel Networks Corp. bought in 1999 for more than $2 billion in stock. (Nortel later sold Clarify to Amdocs Ltd. for $200 million).

Mercury also promoted David Murphy, previously its senior vice president of corporate development, to fill its CFO spot, and elected board member Giora Yaron to replace Landan as chairman of the company's board.

Mercury is an IT governance and applications-testing software maker with ambitions to crack into the top tier of software vendors. Last year, it reported revenue of $685.5 million, up 35 percent from 2003.

Financial analysts are keeping a close watch on the company to see how distracted it becomes by its executive changes and financial turmoil. "These resignations show how important this investigation is and the magnitude of the problems facing Mercury," Piper Jaffray's analysts wrote Wednesday in a note to clients. "The combination of the audit and formal SEC investigation will likely take more management time and effort than many realize."

The farther Mercury's share price plunges, the more attractive it becomes as an acquisition target, IDC analyst Stephen Elliot said.

"They've got a really good jewel in terms of testing/development and some management pieces, but they don't have everything," he said. Elliot sees Computer Associates International Inc. and BMC Software Inc. as potential suitors with complementary strengths.

Losing Landan, who helped build Mercury and steered it for most of the past decade, also increases the probability of the company being sold off, in Elliot's view. "It's sort of the headless horseman now," he said. "This could really change the direction of the company."

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