Once upon a time, let's say 1999, there was a big, warm, and fuzzy bear of an American corporation. It was not only rich, but smart, too. Its very name bespoke quality. Envied though it was, the company reached still higher, striving to set the very benchmark for "a global corporate citizen dedicated to ethical business practices." It was Motorola (MOT
).
While lumbering one day through the technoforest, Motorola came upon a tiny cub of a company. Next Level Communications (NXTV
) was its name. A maker of fancy boxes able to turn a phone company's slim copper wires into broadband pipes carrying not just voices but e-mails and even movies, Next Level looked like a treasure. "The hidden jewel," Motorola called it. So, after seeing Next Level sell stock to public investors at $20 a share, Motorola used its shares to buy an 80% stake in Next Level. It put one of its veterans in charge and secured control of Next Level's board. Swiftly, the stock price sprouted to $202. Motorola looked rich and smart indeed.
Few saw, however, that thunderclouds had gathered over the technoforest. The rain soon fell--and fell. In the deluge, Next Level's key customer, Qwest Communications, nearly drowned. Sales washed away. Red ink bubbled up. Cash ran short again and again, so Next Level kept asking Motorola for more. Motorola gave its little cub enough to stay alive, but barely. When Next Level found other new and willing investors, Motorola turned thumbs down. Each time it gave cash, it took a deeper stake in Next Level.
Suddenly, last summer, Motorola's visage grew grim. Had its jewel turned to glass? Months passed as it mulled its options. Should it keep feeding Next Level until it could find a buyer for its stake, now nearly 90%? Or should it buy off minority shareholders and fold Next Level into Motorola? It queried the company on its prospects for growth. It sought the expert opinions of outsiders. It ciphered the odds first this way and then that. As the winter bore down, Motorola grew quiet and at last made up its mind: It still didn't want others to give Next Level fresh cash. Yet it wanted Next Level to survive. It wanted, finally, Next Level all for itself.
So, one rainy Sunday in January, a messenger from Motorola brought Next Level the news. Motorola would offer to buy minority investors' shares for $1.04 each. To some, this price might seem generous. Only days before, a Next Level share had fetched but 90 cents at market. Yet that was not how other investors, who promptly bid up the shares above $1.20, saw the offer. They instead called it unfair, coercive, a squeeze-out, a freeze-out, a blatant insider trading scheme--in other words, none of the terms usually reserved for corporate citizens dedicated to ethical business practices.
Today, lawyers are swarming and buzzing around Next Level. Motorola pleads it's only striking what is ultimately the best balance for Next Level's entire ecosystem of investors, creditors, customers, employees, and even the broadband-via-copper technology itself. Minority shareholders, plus Next Level's independent directors, complain that on the contrary, Motorola has backed them into a corner: Accept a lowball bid or watch as Motorola lets Next Level collapse.
Now, even the dumbest bunny in the forest might see their point. How can Motorola, without talking to its fellow investors, set a buyout price that's high enough for them yet low enough to suit itself? Negotiating seems the least an enlightened parent might do. After all, who but Motorola can be held accountable for Next Level's suffering? Under Motorola, Next Level lost $385 million.
One of these fine days, Motorola may stumble back toward its goal of good corporate citizenship. In any event, as every fable must, this one ends with a moral: Never--no matter how it tempts you--never, ever buy stock in a company that is majority controlled by another company. For the parent is a bear, and you are but one tick on its cub.
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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