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Argument began Thursday in Next Level Communications Inc.’s lawsuit against Motorola Inc., the company’s majority owner. The Rohnert Park, Calif., broadband equipment maker is asking the Delaware Chancery Court to force Motorola to rescind its $30 million offer for the 26 percent stake in the company it does not already own. Next Level alleges that Motorola attempted to “coerce” shareholders into accepting an inadequate tender offer and that the Schaumburg, Ill., wireless giant exploited inside information to lowball its subsidiary. “We think any one of those would be a problem,” said an attorney representing Next Level. “When you put them together, Motorola has a big problem.” According to Next Level, Motorola, which is the company’s sole financial backer, effectively coerced Next Level shareholders by threatening to withdraw funding if they rejected the offer, which could destroy the value of their investment. “Here we have threats of retribution,” the attorney said. “Stockholders are faced with a decision between tendering into Motorola’s offer, or holding shares in a company that will be hard-pressed to achieve required financing.” Motorola also “systematically mined” Next Level for internal non-public information about the company’s customers, products, profitability and revenues, which gave the telecom an unfair advantage in preparing its bid, Next Level alleges. Representing Next Level in the case are Latham & Watkins of Los Angeles and Richards, Layton & Finger of Wilmington, Del. A spokeswoman for Motorola, which denies the charges, declined to discuss the case, citing the pending litigation. Recent Delaware court decisions in which minority shareholders have sued a company’s majority owner have tended to favor the parent, according to attorneys who have been involved in such lawsuits. David Berger, a partner with Wilson Sonsini Goodrich & Rosati, said it is “highly unusual” for a deal involving a parent trying to roll up a subsidiary to erupt in a legal dispute. “What makes the Next Level situation so unique is the apparent hostility” between the companies, Berger said. “There have been situations where shareholders or the special committees have brought suits against the majority owners of the corporation. But this one looks like it’s a far more hostile situation, with the kind of language analysis that you’d be more likely to see in a hostile deal, as opposed to this type of transaction.” Motorola acquired shares of Next Level in January 2000 through its acquisition of General Instrument Corp. Since December of that year, Motorola has sunk roughly $177 million in debt and equity financing into Next Level to support the company and keep listed on the Nasdaq stock exchange. According to Next Level filings with the Securities and Exchange Commission, the company approached Motorola in April 2002 to discuss a long-term financing strategy. Next Level says Motorola was considering two options — acquiring the remaining public stake in Next Level and integrating it into its broadband business, or grooming the company for a possible sale. This is where things get sticky. Late last year Motorola hired RHK Inc., a telecommunications consulting firm, to examine Next Level’s business model and analyze Motorola’s continued investment. Through RHK, according to Next Level, Motorola obtained “highly confidential customer and financial information” from the company. While RHK was conducting its due diligence, Next Level says, senior Motorola executives received additional confidential information on the company. Specifically, Next Level points to a Nov. 5 e-mail from CEO Michael Norris to Motorola executives about potential customers that at the time were making significant purchasing decisions regarding Next Level products. In the SEC documents, Next Level claims Motorola used the inside information to determine it should proceed with an offer. Said Next Level: “Because Motorola is in possession of substantial non-public information concerning the company’s future financial prospects, the degree of knowledge and economic power between Next Level and the class members is unequal, making it unfair for Motorola to obtain the remaining minority shares of Next Level for the unfair and inadequate consideration it has proposed with inadequate disclosure and veiled threats.” At least one Wall Street analyst has expressed concern over the proposed deal. “We believe Motorola picked the current timing of its bid because investors would soon estimate the considerable size of Next Level’s contract win with Manitoba Telecom in Canada and several other accelerating deployments with Bell Canada” and U.S. telecoms, said Needham & Co. analyst Anton Wahlman in a Feb. 5 research note. Manitoba Telecom uses Next Level’s equipment to deliver bundled digital television, high-speed Internet and telephone services. Wahlman estimates that Manitoba Telecom is on track to make TV over DSL available to roughly 500,000 households. Next Level could generate $200 million in revenue if Manitoba reaches 200,000 households at $1,000 per line, he estimates (Needham & Co. does not have a banking relationship with Next Level). Several minority shareholders in Next Level also oppose Motorola’s offer. In a Feb. 12 letter to shareholders urging them to vote against the $1.04 per share bid, Next Level said three “significant” minority investors, which collectively own 2.4 million shares, or 3 percent of the company, have indicated they are against the transaction. Motorola needs approval from investors representing 90 percent of Next Level’s outstanding shares to complete the deal through a short-form merger. The tender offer expires Feb. 25. Copyright �2003 TDD, LLC. All rights reserved.

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