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It's Siebel vs. the Rebels

George Shaheen has been in his job for two months, and his hectic schedule is clearly reflected in the decor of his new office -- Spartan. One of the only things on the wall is an oversize world map that was there when he moved in. A 10-year board member, Shaheen took the top job at troubled Siebel Systems (SEBL ) the day Chief Executive Mike Lawrie was axed.

Since then, he has spent much of his time on the road, meeting with skittish customers and concerned market researchers, and leading town hall meetings to calm worried employees. Siebel, a company that has been in a three-year tailspin, faces an outright shareholder revolt led by hedge funds that are pushing for it to be sold.

At Siebel's annual meeting on June 8, investors are going to ratchet up the pressure on Shaheen. BusinessWeek Online has learned that some investors plan to withhold their votes for Chairman Tom Siebel. Dissidents claim that up to 30% of the shareholder base is unhappy with management, and this will be the first opportunity to send a message. But it'll only be a message -- by the time shareholders started organizing, it was too late to propose alternative board members.


An angry investor base is just one of the issues making Siebel's turnaround an act Houdini would be proud of. Siebel is doubling down on its long-time focus on customer relationship management software (CRM), a strategy that critics say has allowed software companies such as SAP (SAP ) and Oracle (ORCL ) to steal customers by the thousands.

While these rivals provide huge software packages running everything from a company's accounting systems to its call centers, critics complain that Siebel is a one-trick pony -- making only software for managing salesforces and customer-service departments. "The market matured, and best-of-breed is withering away," says former Siebel exec Bill McDermott, now CEO of SAP Americas. "Siebel is the most dramatic example of that."


Next month, it'll unveil new software, code-named Nexus, that it has spent three years and more than $500 million to develop. It's a twist on Siebel's best-of-breed mantra: Nexus breaks the company's core software product into Lego-like components that can run on standard Microsoft (MSFT ) and IBM (IBM ) platforms. Customers can buy the pieces they want à la carte and snap them together with software they build themselves or components from other software companies.

Nexus may be Shaheen's best shot at restoring growth. It gives Siebel its first product to sell to companies that want to build their own CRM applications -- a $24 billion untapped market that's now mostly served by pricey consultants. Shaheen says that market is nearly five times the size of the packaged CRM market where Siebel made its fortune.


So far, those moves haven't soothed investors. They have a long list of gripes, including Lawrie's ouster after only 11 months in the job. They're fed up with Siebel's poor results and management's refusal to use its $2.2 billion cash horde to fund a stock buyback or issue a dividend. "The reality is, very few investors they have left are technology investors or software investors," Jana Partners' Lehmann says. "These are more active, more aggressive shareholders hoping for action. I don't think they get that."

The cash is a particular sticking point, and the dividend is intended as a compromise. Shaheen has reiterated that the company will not do a buyback, instead saving its cash for future acquisitions, Shaheen says. "It's hard to give it back when you know you haven't yet exhausted the analysis on what you might do with it to grow the business," he says. "I want to do the right thing. This has got to be a long-term game."


Many on Wall Street think Siebel is stuck fighting a losing war. "They're fighting a two-front battle, and SAP has considerably more resources. At the other end, there's a more flexible nimble company in Salesforce (CRM )," says Peter Coleman, analyst at ThinkEquity Partners, a San Francisco investment bank. "I don't know what company wins a two-front battle that are two separate distinct battles."

While buying Siebel used to be a no-brainer for customers looking for CRM, Shaheen & Co. are now struggling for every deal. Although Siebel has a reputation for providing solid technology, some customers complain that its software is too complex. Many are fed up with the integration woes they've encountered over the years. They're sick of paying millions up-front, then paying a consulting firm even more getting it to work.


Shaheen's solution is to position Siebel as the only company that can sell CRM any way the customers want it. With more than 4,000 companies using its software, he says Siebel knows more about solving customer-relationship problems than anyone in the business. His executives admit they've done a poor job of leveraging that expertise. But if Shaheen, the former consultant, can change that, Siebel could once again become the go-to company for solving tough CRM problems -- a real point of differentiation from Salesforce and SAP.

"Go after the custom business. Go after the ugly, very complicated problems that aren't solvable with current technology," advises Coleman of ThinkEquity Partners. "That's a huge opportunity and a way to get away from SAP."

That is, if investors give Shaheen a chance. Siebel's Cleveland dismisses some of the more outspoken shareholders as "sharetraders." But like it or not, that's the investor base -- hedge funds. If Shaheen doesn't convince them that Siebel can make it alone, they could foil his comeback -- and his shot at redemption.
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