Tech companies warding off takeovers

With depressed stock prices and, in some cases, assets worth more than their market valuations, many technology companies are feeling vulnerable to unwanted suitors.

"If you have a market cap of $50 million and cash on hand of $100 million, you're ripe for abuse," said David Burger, a lawyer who helps companies install anti-takeover measures.

Burger said his firm, Wilson Sonsini Goodrich & Rosatim, has seen almost a doubling of its anti-takeover business since last year, with seven companies in the last three months seeking their help.

In a hostile takeover, a company is taken over by another company, or a well-financed so-called raider, against the wishes of management and the board of directors. If the offer price is high enough, company shareholders may vote to accept the offer even if management resists and says the company is worth more.

On the forefront
A shareholder-rights plan known as a "poison pill" makes a takeover extremely expensive by triggering a flood of new stock to dilute any stake a hostile bidder may seek. A board of directors can implement a poison pill at any time and does not need shareholder approval.

"Companies often used to leave it out until there was a perceived threat," said Marty Korman, a Wilson Sonsini partner. "But now it's on the forefront of their minds" because the shares of many tech companies have plunged by 50 percent to more than 90 percent in the past 12 months.

General Semiconductor, a company that makes semiconductor components, enacted a poison pill in 1997 and recently has been fending off buyout pressure from electronic components company Vishay Intertechnology.

Vishay, according to sources, quietly approached General Semiconductor several months ago with a buyout proposal but was rebuffed. Vishay stepped up the pressure earlier this month by issuing a public statement saying it wanted to buy General Semiconductor by exchanging one share for every two shares of General Semiconductor, valuing the deal at $470 million.

On Wednesday, the board rejected the latest offer, saying it was not in its shareholders' best interest.

The poison pill at General Semiconductor will be triggered if anyone acquires a 15 percent stake in the company. The company's stock has fallen almost 50 percent from its 52-week high of $21.12 and closed at $11.73 on Thursday.

Blame it on the markets
With undervalued stock playing a significant role in whether a company is an acquisition target, the market downturn that dragged down stocks across the board has prompted many tech companies to consider anti-takeover measures.

Potential suitors are even more interested when a company's assets are worth more than its market capitalization.

That is the case with Internet consulting company Viant, which has shares trading below $2, off a 52-week high of $42.68. The Boston-based company, excluding charges, estimated it had about $165 million in cash alone at the end of March. But its market value is only $79 million.

It adopted a poison pill several weeks ago that takes effect if an individual or company purchases a 15 percent stake.

"Our stock price had a lot to do with our decision," spokeswoman Connie Bienfait said. "We were trading below our cash value, and that prompted the board and our attorneys to look at a shareholder-rights plan."

Viant's poison pill also bolsters its other anti-takeover defense, a board of directors with staggered terms, which makes it difficult for bidders to eliminate an entire board and replace it with supportive directors.

No complaints
Since the shareholder-rights plan has been put in place, a few shareholders have called with questions but no complaints, Bienfait said.

Even portal giant Yahoo recently adopted a poison pill.

Yahoo, a massive presence on the Web, has seen its shares veer from a 52-week high of $173 to a low of $11.37. As of last quarter it had total assets of $2.4 billion, but its market cap far exceeds that level at $9.7 billion.

Acquiring a tech company--in a friendly or hostile way--is often more difficult than in other industries because the value of tech companies is closely tied to the intellectual power of workers such as engineers and researchers.

"No one wants to do a hostile takeover. There are social and economic ramifications of doing this. People always opt for a friendly takeover and do a hostile one as a last resort," Korman said.

Hostile action varies in degree. In the case of Vishay, making an unsolicited offer public is considered a mild form of pressure known as a "bear hug."

In rides the white knight
But those kinds of moves can lead to negotiated agreements in which a target company either agrees to be purchased by the original bidder or seeks a white knight to buy the company.

In the past five years there have been about 200 attempted hostile takeovers across all industries, investment bankers say. Of those, about 30 percent to 40 percent were fended off; 20 percent to 30 percent were sold to white knight companies; and hostile bidders acquired the remaining 30 percent to 50 percent.

That ratio is consistent for the technology sector but on a much smaller scale. In the past decade there have been only nine hostile takeover attempts against tech companies. Of those, four were successful, such as telecom giant AT&T's acquisition of NCR. Another successful hostile takeover was IBM's buyout of software maker Lotus.

Trying to enact some measures may not be possible. Creating a staggered board, for example, needs shareholder approval, and shareholders generally disapprove of any impediments that would prevent a friendly or hostile buyout offer from coming forward.

Companies can also consider eliminating "written consent," which allows a rogue shareholder to solicit a simple majority of shareholders to take action outside of shareholder meetings.

But even with anti-takeover defenses in place, it can be difficult to fend off a serious takeover attempt.

"If you have a relentless raider that is willing to pay a very high premium and is fully financed with cash or a strong liquid currency, their chances of succeeding or causing the target company to sell itself are very high," said Matt L'Heureux, managing director of Goldman Sachs' worldwide technology mergers and acquisitions operation.

"In these cases, it's very hard but not impossible for companies to stay independent, and anti-raid provisions can give a board time to consider alternatives."