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