Exclusive-How SUSE deviated from its internal controls while warning about sales risk

LONDON : Software firm SUSE, whose clients include Microsoft and BMW, told investors in January it was tightening its scrutiny of commercial deals.

SUSE, whose software helps large companies run servers, said in its annual report for 2022 that to ensure sales were “appropriately authorized” it had created a deal desk – a department commonly used by software businesses to vet commercial and contractual terms.

Founded in 1992, SUSE had been publicly traded since 2021 and creating a deal desk aligned it with other listed companies in the sector.

“SUSE may enter into high-risk or commercially inappropriate deals if it does not exercise effective control over the Sales organization,” it said in the report. The company noted that “‘Commercial governance’ is a newly identified risk this year” and a heatmap in the report ranked the risk as “possible” and its impact on the business as “high”.

Reuters wasn’t able to establish what prompted that warning.

Nine company  documents seen by Reuters relating to two of SUSE’s recent sales, as well as interviews with  three people with knowledge of the transactions, shed light on some examples of the company’s decision-making as it has tried to  tighten commercial controls.

Lawyers for SUSE said in a letter to Reuters on Sept. 22 that the creation of the deal desk was “nothing more than a natural governance maturity exercise, undertaken by a scaling and young listed business”.

SUSE’s majority shareholder, EQT, in August offered to take the software company private  after it slashed sales targets this year, its CEO and CFO departed, and its shares plunged. SUSE held an extraordinary meeting on Nov. 13 at which shareholders approved to delist the stock from the exchange.

“Execution challenges and several changes during the past twelve months have impacted SUSE’s operating performance and market valuation,” EQT said in a statement on the public offer in August. It added that leaving the public stock market would ease pressure from “short-term demands” on the new management. EQT declined to comment for this article.

Its offer for SUSE shares, which were traded in Frankfurt, valued  SUSE  at 2.72 billion euros ($3 billion), some 47 per cent below the level of the 2021 IPO. SUSE shares last traded at 10.89 euros on Nov. 13 before the delisting, according to the exchange Deutsche Boerse, 64 per cent below its IPO price.

SUSE’s revenue in the financial year to October 31, 2022 was $653 million. Its 2022 annual report, filed on January 19,  said the deal desk should review any deals greater than $500,000. Lawyers for SUSE’s former CEO Melissa Di Donato, who stood down on March 21, told Reuters the deal desk was created after a joint decision by the executive team and the company’s board.

According to four documents reviewed by Reuters and two of the people with knowledge of the situation, Di Donato greenlighted the commercial terms of a roughly $1.4 million sale to South African utility Eskom in late January, bypassing the deal desk’s scrutiny in order to speed the process, less than two weeks after SUSE told investors the desk would help to improve controls.

On January 30,  after commercial terms of the Eskom deal had been agreed, a senior SUSE executive said in an email to other company officials that the terms had not been submitted to the deal desk.

In late February, an executive told colleagues in an email that the sale had not been scrutinized by the deal desk before being agreed but the team would review the terms to familiarize itself with the transaction, according to the documents and two people with knowledge of the transaction.

The deal would still be logged into SUSE’s systems as approved by Di Donato without sign-off from the deal desk, the executive said. Reuters could not determine if this was done. There was no suggestion in the documents reviewed by the news agency of any problematic issues that arose from the terms of the deal.

A lawyer for Di Donato said in the letter to Reuters that it was “highly misleading” to suggest she had reached the Eskom agreement without submitting it for the deal desk’s approval: “the deal desk was aware of the deal. Nothing was skipped.” SUSE lawyers didn’t address directly whether approval from the deal desk had been skipped on the Eskom transaction.

A spokesperson for Eskom did not comment on SUSE’s due diligence but said that “Eskom’s established processes and governance structures were adhered to during this procurement.”

DISCOUNTED DEAL

As part of the new risks identified in the annual report, SUSE warned in January that: “quarter-end pressure may exacerbate the risk as sales staff try to get deals over the line.”

The documents  reviewed by Reuters show the efforts SUSE made to  clinch one deal: in December 2022 SUSE discounted a sale to Bank of New York Mellon by more than 90 per cent from the listed price. 

SUSE sales growth was slowing at the time. Di Donato agreed to offer BNY Mellon the discount on a package of services originally listed at several million dollars, according  to emails and a person familiar with the transaction. Reuters could not determine what SUSE’s original offer was.

Under the discounted deal, BNY Mellon was offered a one-year package that included  SUSE’s Platinum service and 10,000 ‘nodes’, according to the documents and one of the people.

Lawyers for Di Donato said “the scope, the services and the size of the BNY Mellon deal changed from what was originally on offer and, therefore, the final price changed accordingly.” Di Donato’s lawyer added “it was not part of her responsibilities as the CEO of SUSE to track discounts on deals,” and “the discount was approved in collaboration with others”.

A spokesperson for BNY Mellon declined to comment on the deal.

Lawyers for SUSE did not comment on the terms of the deal, saying it was confidential. Reuters could not determine if the deal was vetted by the deal desk nor how many deals have been going through the unit.  

Without referring to SUSE specifically, Christian Strenger, director of the Corporate Governance Institute (CGI) at the Frankfurt School of Finance & Management, said that software-related services companies, in particular, have pressure to meet quarterly and year-end performance targets as they often rely on large individual sales.

Di Donato’s lawyers said that quarter-end pressures affected all companies: “Our client has never forced a sales team to close a deal that was not good for the business.”

SUSE and Reuters parent company, Thomson Reuters, are involved in litigation over the use of SUSE software products. SUSE claims that Thomson Reuters breached the terms that allegedly governed its use of SUSE software products.

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