News: Analysis & Commentary: DEALS
SOCIAL CONSCIENCE FOR SALE?
What do you call a "socially conscious" company that agrees to a merger giving its CEO a lucrative five-year contract while shareholders and key managers are left with crumbs? "Hypocritical" is one term being bandied about by disgruntled investors in Ryka Inc., a small sneaker maker best known for combating violence against women.
Investors are livid about a Jan. 30 agreement to sell the Norwood (Mass.) company to L.A. Gear Inc. for $16.4 million. The offer, about 62 cents a share, was roughly equal to the stock's closing price the day before, and well below its recent high of $1.09 last September. Shareholders were further incensed to learn that Ryka founder and CEO Sheri Poe will get a perk-laden contract with L.A. Gear worth at least $1.3 million. Two investors have filed lawsuits seeking to block the deal.
PERSONAL TRAUMA. Some Ryka employees, meanwhile, are angry that the merger doesn't include provisions for managers other than Poe, leaving most insiders with worthless or near-worthless stock options. Chief Financial Officer Roy S. Kelvin resigned in protest on Feb. 24. "There's a lot of disappointment from shareholders and employees who feel they haven't been rewarded for their commitment to Sheri and her vision ef the brand," he says.
These days, lawsuits seem to pop up after mergers like mushrooms after a rainstorm. But angry Ryka shareholders seem to view the deal as almost a personal betrayal. A rape survivor, founder Poe wove her personal trauma into a potent "cause-marketing" message for Ryka that stressed fitness as an antidote to violence against women. The company also donated money to a foundation set up by Poe to combat such violence and emphasized its status as a female-run company making shoes especially for women. The pitch helped persuade investors to plow money into three public offerings.
"One of the reasons we invested is that this is a socially conscious company," says Elizabeth Hermon, a Cambridge (Mass.) psychotherapist who says she and her husband bought 150,000 Ryka shares. "It's run by women, for women. Investing in something like this is one way women can help each other." In the deal with L.A. Gear, Hermon complains, "[Poe] is well taken care of, and the rest of us definitely are not. How could a company with such strong ideals make such an unfair deal?"
Poe won't comment, citing the lawsuits, but insiders contend the criticisms ignore some hard facts. Although Ryka eked out a slim profit in the first two quarters of 1994, it never made an annual profit. In 1993, it lost $3.4 million on revenues of $14.4 million. Its credit is so poor that it has been paying interest rates of more than 20% to a Korean company to finance its orders. Ryka has been given a "qualified" report by auditors every year since its 1987 inception.
CASH SUPPORT. In other words, says Susan E. Engel, an outside director, the merger price shouldn't be judged against stock fluctuations based mostly on hype. "People who were buying the stock were taking a gamble," she says. The deal was negotiated, Engel says, by outside directors who concluded "the company's growth prospects were better with L.A. Gear. If you don't grow and you don't make money, it's hard to continue social advocacy." What's more, Engel says Poe negotiated her contract with L.A. Gear--including a $100,000 salary raise--separately and says the board didn't know the details until after the documents were finalized.
Based on facts available, Boston lawyer Louis A. Goodman of Skadden, Arps, Slate, Meagher & Flom believes investors' suits will be hard to win. "The directors have no obligation to auction the company, although they need to show that this is the best deal they could get." Its financial plight, he adds, "gives the board a reasonable case."
Perhaps Poe's mistake came in holding herself up as a moral pillar. People expected her to adhere to a higher-than-average standard. When she didn't, they accused her of perfidy. The lesson: Money, ultimately, may talk louder than social good.
SHERI POE'S DEAL
The Ryka founder's take under the L.A. Gear deal
$250,000 for three years; $300,000 by the fifth year
Up to 50% of salary
310,000 L.A. Gear stock options
$300,000 interest-free for five years
DATA: COMPANY REPORTSBy Mark Maremont in Boston