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Technology companies had little fear of hostile takeover bids during the bubble years of the 1990s. Shotgun marriages could well result in an exodus of engineers and software designers once considered a tech company’s most important asset. No longer. An anemic stock market has shriveled tech stock prices. Now, more tech companies fear takeover bids from bargain hunters with more cash and higher stock valuations. The result? Poison pills, once rare in the technology industry, are rising as companies adopt shareholder rights plans to fend off predators. Of the 27 companies that have adopted or amended poison pills since early April, 16 businesses are technology companies. Among those 16, 10 saw their stock prices hit 52-week lows in late March or early April. And with layoffs the order of the day, the fear of losing a target’s employees is a less frightening aspect for potential acquirers. “So many more people are looking for tech jobs now that a hostile acquirer could come in at a very low price,” said Thomas Drago, a partner in the New York office of international law firm Coudert Brothers. “Lose a few people at the target, make sweet deals to keep some of the others, and find new talent to replace anyone who flees.” Industry watchers add that the increase in poison pills also reflects the maturation of various technology sectors. Many companies in sectors such as networking and telecommunications just recently went public. Rarely will a company adopt a shareholder rights plan soon after its debut on the public market. The reason: A poison pill complicates the company’s capital structure, said John Savage, a partner with Palo Alto, Calif., investment bank Alliant Partners. “You want to keep it clean and simple, at least at first,” he said. But low stock prices are nudging these companies to adopt these plans sooner rather than later. “A lot of these companies have had very high stock valuations during the past couple of years,” said Doug Smith, a partner with Gibson, Dunn & Crutcher in San Francisco. “Now that the market has changed so much, it’s a very good time to update and adopt a rights plan.” While they are complicated to assemble, shareholders’ rights plans are relatively simple to execute. All a company must do is declare a dividend on its common stock that consists 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 often will hire an investment bank to help it figure out how to estimate the exercise price. The price has historically been roughly three to five times a stock’s current value. But many technology executives are still in shock over how low their stocks have dropped. Consequently, many technology boards set the exercise price for their poison pill at a much higher multiple of current values than would be set at a more traditional, old-economy company. For example, Santa Clara, Calif.-based broadband equipment and software designer Extreme Networks Inc. saw its stock hit a 52-week low of $12 on April 3. Yet the exercise price set under its shareholder rights plan, adopted three weeks later, is $150 — more than 12 times Extreme’s lowest stock price of the past year. 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 rights holders who exercise their rights generally pay the exercise price but get two shares for each right. The potential acquirer who crosses the 15 percent threshold does not hold such rights, and consequently sees its stake dwindle. “The person who crosses that threshold pays for 15 percent of the company’s stock, but if you run the numbers, they generally end up seeing their share diluted to well below 5 percent once the rights held by other shareholders are exercised,” Drago said. Yet another reason for the upsurge in poison pills could well be simply the need for legal advisers to drum up business. As the stock market has slumped, the number of technology mergers and acquisitions has fallen off as well, which in turn means less business for M&A attorneys accustomed to a free-flowing spigot of M&A fees over the past few years. “There is less talk of poison pills when lawyers are busy,” Savage said. “Now they’ll be sitting around the table at a board meeting telling the company, ‘You guys really ought to adopt a poison pill.’” Related chart: Recently Adopted Shareholder Rights Plans Copyright (c)2001 TDD, LLC. All rights reserved.
Bankruptcy in the Dot-Com Economy. May 29-June 11.

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