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Of the more than 20 companies that adopted shareholder rights plans — or poison pills — during the past six weeks, few did so because their prospects were particularly sterling. The number of companies adopting poison pill provisions in the second half of the current quarter continued at roughly the same pace as in the first half, when The Daily Deal began tracking this data. Twenty-two companies announced rights plans from May 10 to July 20, compared with 27 over a comparable period this spring. About a third of the companies announcing poison pills in the most recent period recorded 52-week stock-price lows during the past couple months, making them potentially attractive acquisition targets. Most of the others are trading relatively near their year-lows. “Their stock is down, they have no interest in exiting and they are beginning to hear footsteps,” said Clifton Gray, an analyst with Kaufman Brothers of New York. One exception to this defensiveness generated by slumping share prices: network router designer Riverstone Networks Inc. Granted, the Silicon Valley company, set to spin out of Internet infrastructure company Cabletron Systems Inc. August 6, builds equipment for the downtrodden network service provider market. Unlike many of its competitors, however, Riverstone is in trials with important customers, is primed to grow when the market rebounds, has a healthy balance sheet, and, as a consequence, is likely to be in the sights of acquisition-minded networking companies. “Riverstone right now is one of the most acquirable companies in the networking space,” said C.E. Unterberg, Towbin analyst Martin Pyykkonen. “Unlike a lot of inexpensive stocks in the industry, Riverstone doesn’t carry any baggage or problems with it — it’s clean.” The company’s shares, which debuted on the public markets Feb. 16 at $12, reached $17.80 in July 20 trading after having topped the $24 mark. But for most other companies that recently added poison pills to their corporate codes, historic stock lows — not highs — appeared to be the driver. Companies adopting shareholder rights plans invariably say that it is not intended to deter a particular takeover attempt, but simply to ensure that stockholders get fair treatment in event of an unsolicited offer. The plans themselves tend to be boilerplate as well. Under the relatively standard formula, a company declares a dividend on its common stock consisting of rights to purchase common stock or a new series of preferred stock at a price equal to the estimated long-term value of the common stock. The company’s board also often hires an investment bank to help it figure out how to estimate the exercise price. Historically, that price has ranged from three to five times a stock’s value. The rights usually become exercisable once a third party acquires or offers to acquire a chunk of the company’s stock beyond a certain percentage, usually around 15 percent. This dilutes the new stake of the interloper. All shareholders who exercise their rights generally pay the exercise price but get two shares for each right. The potential acquirer that crosses the 15 percent threshold does not hold such rights, and consequently sees its stake dwindle. A notable difference emerging during the past six weeks was a decline in the proportion of technology companies moving to protect themselves from unwanted takeovers. From April 1 through mid-May, about 60 percent of the companies adopting poison pills were from technology. In the last half of the quarter, by contrast, only a third were high-tech companies, including Riverstone, storage area network system designer McData Corp., online financial services provider E*Trade Group Inc. and digital display semiconductor maker Sage Inc. Although most of the companies in the accompanying chart are watching their stock prices scrape bottom, Indianapolis-based restaurant chain Steak n Shake Co. hit its year-high of $9.50 June 21. Related chart: Shareholder Rights Plans Adopted in the Second Quarter Copyright (c)2001 TDD, LLC. All rights reserved.

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