No Investors, Please
from
Summer 2001
by David Moon
Back in the days of the Internet stock bubble, high-tech companies
spent as much effort trying to attract investors as they did customers.
You know why: Successful stock offerings were key to funding their
operations, since profits were nonexistent.
How things change, and never more so than at Geoworks, a software and services company engaged in mobile data communications. The company’s stock fell from a high of $54.80 a share in March 2000 to $1.90 in May of this year. Despite this freefall, Geoworks is actively discouraging the purchase of shares by the same large investors it used to court.
How Geoworks has done this is spelled out in a “shareholder rights plan” filed March 12 with the Securities and Exchange Commission. If a hostile investor buys 15% or more of Geoworks’ shares, existing shareholders have the option to buy additional stock at a discount of approximately 50% of the market value.
The plan effectively prevents a suitor from acquiring a controlling interest in the company since any new stake is immediately diluted. A better name might be an “executives’ rights plan” since it is the executives running the company who have the most to lose if it is acquired.
Geoworks isn’t the only company to put out the un-welcome mat. At least 15 companies have adopted such plans this year. Among them: Gateway, Palm, and Yahoo!
They’ve done so, moreover, during times when their stocks could have benefited from big investors. In May, Gateway shares were down from a 52-week high of $70 a share to $18, while Palm and Yahoo! both fell more than 90% over the same period.
Like Geoworks, these companies’ shareholder rights plans discourage new investors who recognize a cheap stock when they see one—and who might well snap up the whole company. Some financial analysts describe this defense strategy as everyday corporate governance. Says Scott Greenstone, an investment analyst at Thomas Weisel Partners: “I think it is fairly standard for most companies to adopt shareholder rights plans.”
Standard, maybe. Questionable, certainly. Without such dilutive plans, potential acquirers are free to identify and exploit business opportunities that could mean unseating management.
No one can force a shareholder to sell his or her stock to a raider. So why do companies need more protection? If shareholders think their stock is priced too cheaply, they have the means to prevent vultures from buying a controlling interest: They can refuse to sell their stock.
David Moon is president of Moon Capital Management.
