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.”
According to Edgar Bronfman Jr., the Seagram heir and Vivendi Universal’s executive vice chairman, who was the key negotiator on the MP3.com deal, such a gradual shift from suing to wooing is exactly what happened in Vivendi Universal’s approach.
“At the time of the litigation, we were litigating,” he says of the period between January and November 2000. As the case moved toward the judgment, though, MP3.com’s “unique technical capabilities, a large audience, and an identifiable brand name” had begun to look pretty good to Vivendi Universal. And by May, when the deal was announced, the acquisition made perfect sense. “We thought it would be accretive to earnings and good for shareholders, which is the only reason to acquire anything,” says Bronfman.
Indeed, buying MP3.com has sped the development of Vivendi Universal’s new online music subscription service, Pressplay, due to be launched soon. It also has made Vivendi Universal a rival to MusicNet, the joint venture among major competitors, including Bertelsmann and AOL Time Warner.
Too Small for Enemies
Online advertiser 24/7 Media Inc. (now 24/7 Real Media) also used a court battle to its advantage earlier this year, as it looked to sell noncore assets to get a quick cash infusion. Its Sabela ad-targeting technology was one candidate for the auction block, since it duplicated other operations. When 24/7 studied potential buyers, though, its top competitor, DoubleClick, seemed the most natural fit. Tony Plesner, 24/7’s COO and de facto CFO at the time, knew that because of information gleaned from the lawsuits DoubleClick and 24/7 had traded over a disputed patent on Sabela’s technology.
After an out-of-court settlement in November 2000, which involved some cross-licensing agreements, 24/7 executives approached their erstwhile adversary about buying Sabela. Compared with other bids, DoubleClick’s was the “most attractive and expeditious,” says Plesner, and by May, 24/7 had its cash: about $5 million in the bank. “This industry is too small to have enemies,” he adds.
In a way, it hurt to cede customers to a former court rival, especially at a steep discount from Sabela’s purchase price. Plesner did, however, find a way to squeeze some more from the deal, through contingency earn-outs. This feature–giving 24/7 a chance at additional fees based on DoubleClick’s success in moving customers to its own competing technology over a short period–ultimately produced extra proceeds of about $500,000.
Negotiators in such deals say rivals must be willing to trust one another and be willing to forget the past and stick to current facts. “We ring- fenced this from every other negotiation we had with DoubleClick,” says Plesner.
Playing it cool can help, too. “If you go in there saying, ‘The only thing we can do is sell our company,’ and spend 98 percent of the time trying to convince them to buy you, you don’t get anywhere,” says MP3.com’s Ouyang. He says his company had the financial strength to stand alone if the Vivendi Universal deal had not worked out. “You have to convince yourself that you control your own destiny.”
Deals forged by strife aren’t always so conciliatory. Consider what happened to American MetroComm Corp. (AMC), a telecom start-up that sued Cisco Systems last year over allegedly faulty equipment, and was countersued. Driven into bankruptcy by the cost of replacing the equipment, as well as by litigation fees, AMC found that when it tried to sell its assets in October 2000, Cisco was the top bidder. The $20 million purchase–a clear win for Cisco, which retained the “litigation assets” and immediately resold the operating assets to another telecom provider–worked out well for AMC creditors, too. They “were pleased to get cash, as opposed to litigation against Cisco,” says Bill Peluchiwski of Houlihan Lokey Howard & Zukin, head investment banker for the deal.
But for former AMC executives, there was no mercy. Lawsuits “are still flying fast and furious,” says Brian Eddington, one of the firm’s prebankruptcy attorneys, while Cisco tries to recapture the $90 million balance it says it is owed for equipment.
Alix Nyberg is a staff writer at CFO.
Lawsuits can pave the way for all kinds of transactions
When Alcoa Inc. agreed to buy aluminum-making rival Reynolds Metals Co., for example, a pesky federal antitrust suit by McCook Metals, a smaller metal-maker, stood in the way. To settle, Alcoa delivered its Longview, Washington, aluminum smelter to McCook in exchange for its dropping the litigation.
Indeed, these days such outcomes as cross-licensing provisions and the assignment of equity stakes frequently result from legal settlements. “When you’re dealing with businesspeople, there’s the opportunity to get things done that they wouldn’t be able to get from the lawsuit itself,” says Eugene Lynch, a retired federal judge in San Francisco who has been resolving cases for 40 years. He says 40 percent of his cases incorporate some type of noncash solution into the settlement terms.
Experts caution deal makers to address possible default contingencies carefully, though. Doing so helped Advanced Fibre Communications (AFC), a Petaluma, California, telecom equipment provider. After spending two years pursuing a trade-secret abuse case against a unit of Marconi Communications, AFC agreed to settle last February. The company dropped the charges, and Marconi agreed to pay $32.8 million in cash up front and to sell a minimum of $110 million of AFC products in new overseas markets over three years.
“It made sense, since it was a new channel for [AFC] and could have had an impact on future earnings potential,” says George Notter, senior telecom equipment analyst with Deutsche Banc Alex. Brown. But without much motivation to sell its rival’s product, Marconi has made little progress on AFC’s behalf, leaving annual payments at minimum levels. – A.N.
Nurtured in Court
Vivendi Universal vs. MP3.com (2001)
Six months after Vivendi Universal won a $53.4 million court settlement, it agreed to buy the online music distributor.
American MetroComm vs. Cisco Systems (2000)
AMC claimed faulty Cisco equipment caused AMC’s bankruptcy; Cisco countersued for default on payments. Cisco later bought AMC through bankruptcy court.
Pfizer vs. Warner-Lambert (1999)
Pfizer sued to stop a Warner-Lambert merger with American Home Products. Pfizer later struck a $90 billion deal for W-L “in a spirit of partnership and mutual respect.”
Source: Press Reports