Managing the sale of your business is never easy. But picture having to negotiate across the table from a buyer that has just tried to drag you under with a lawsuit. Then, imagine that this adversary-turned-suitor is a $40 billion global giant and you’re an $80 million New Economy start-up.
That’s the hot seat MP3.com CFO Paul Ouyang found himself in earlier this year, bargaining with Vivendi Universal. “It was a different kind of deal,” says Ouyang, who has held previous finance jobs at J.P. Morgan, KPMG, Cheap Tickets, and Tickets.com. “First, we were in courts trying to damage each other; then, sitting around the table trying to figure out how to help each other.”
Indeed, only months before, Paris-based Vivendi Universal had extracted a $53.4 million federal-court judgment from the Internet music-portal and infrastructure-technology company, having charged that MP3.com let music fans illegally download and store music by Universal-licensed artists. Vivendi Universal’s petition, originally seeking $450 million, was downright “vitriolic,” according to Raymond James & Associates analyst Phil Leigh. The subsequent acquisition “was one of those deals you never thought would happen.”
Last May, though, it did happen, with Vivendi Universal agreeing to a $372 million purchase price that gave MP3.com shareholders a 66 percent premium for their stock. The deal also gave MP3.com global market reach, and deep pockets with which it could settle the other $1 billion of copyright violation suits it faced. And as recompense for San Diego based MP3.com potentially losing its autonomy, executives won lots of short-term incentives–including a $13 million retention pool for employees and multi-million-dollar bonuses and immediate options vesting for CEO Robin D. Richards and Ouyang, first elevated to executive vice president of corporate and strategic development and subsequently made COO of VUnetUSA, the new U.S. Internet operations of Vivendi Universal. “We arrived at one of those win-win situations,” says Richards, who also managed to guarantee a minimum of six months’ salary for his secretary.
Opportunities in a Lawsuit
Such a turn of events–with rivals falling into each other’s arms after first sparring in court–is far from unique, of course. Pfizer Inc.’s purchase of Warner-Lambert last year came only after the two had exchanged lawsuits over Warner-Lambert’s proposed merger with American Home Products, which Pfizer claimed would infringe on its joint marketing agreements.
Such deals may become more common. Experts say the MP3.com and Warner-Lambert purchases, among others involving suit-weakened companies, underscore how selling out to a competitor can be an increasingly attractive alternative to liquidation in today’s slack economy. Today, companies can’t afford to hold grudges, these authorities say.
“Litigation, in effect, is becoming a tunnel to new deals,” according to Prof. Robert Lamb, of New York University’s Stern School of Business. “Management is forced to learn hard realities and look at business opportunities through a different lens than they did before.”
He sees the trend as an extension of the numerous hostile takeover bids of the 1980s and ’90s. Richard Gervase, a Mintz Levin Cohn Ferris Glovsky and Popeo partner, agrees. “The discovery process is not meant to ferret out business opportunities,” he notes. “But in the process of litigation, parties will oftentimes get the facts they need to weigh the relative strengths and weaknesses of an IPO portfolio. It’s in the litigation that you find out how enforceable that patent or copyright is.”