One of the site's co-founders offers new evidence that parent Intermix Media knew the $580 million it accepted from News Corp. was too low
When News Corp. (NWS) Chief Executive Rupert Murdoch paid $580 million for Intermix Media, parent of social network MySpace.com, talk was he overpaid. MySpace lacks a business model, and the cool kids who flock to the site will hit the road as soon as it sells out to Big Media—or so the argument ran.
More than a year later, overpaying is a moot point. MySpace.com's traffic has more than doubled, and the site has become the sixth-most popular in the world. If anything, News Corp. didn't pay anywhere near enough, say some Intermix shareholders. And they're taking that frustration to court, filing complaints that accuse Intermix management of breaching fiduciary duty and disseminating misleading information.
Indeed, in the year since the News Corp. purchase, MySpace's net worth has nearly tripled, to $1.5 billion, according to Soleil-Media Metrix. "This is probably one of the best acquisitions ever," says M&A expert Tom Taulli. And that value should climb some 20% a year, along with the growth of the online advertising market, figures Laura Martin, an analyst with Soleil-Media Metrix. "It obviously wasn't a good deal for [original] shareholders," she says. "If they waited a year, they would have gotten $1 billion more."
VIACOM ICED OUT?
Some shareholders say they would have done just that, had Intermix management been more forthcoming with information on the company's value. And on Oct. 5, MySpace co-founder Brad Greenspan went public with information he says shows Intermix knew it was selling MySpace on the cheap.
In a report, Greenspan alleges the Intermix board knew MySpace.com was worth significantly more than News Corp. paid. He also claims Intermix refused to work with News Corp. rival Viacom (VIA), which was considering placing a competing bid for MySpace.com. Greenspan owned 10% of Intermix at the time of the sale.
Greenspan has made such allegations before, but now he's backing them up with what he says is evidence, including internal e-mails he's obtained through legal action. One e-mail, published on Greenspan's site (www.freemyspace.com) and authored by Intermix CEO Richard Rosenblatt, reads, "I am looking forward to supporting the 20B dream." Greenspan says it's a reference to the idea that MySpace will be worth $20 billion in coming years—and that Intermix top management knew it.
Another e-mail indicates Intermix was also fielding overtures from Viacom, according to Greenspan. A Viacom executive "just called w lots of luv," writes Rosenblatt to Intermix Chief Operating Officer Sherm Atkinson. Viacom did not respond to a request for comment. Rosenblatt, now CEO of Demand Media, declined to comment through a company spokesperson.
In a statement to BusinessWeek.com, News Corp. said: "It's unfortunate that Mr. Greenspan continues to issue press releases complaining about a deal that many industry experts initially believed was a risk for News Corp. to take. We've strategically built this business since the acquisition and are just now beginning to realize real financial value. This is simply a case of sour grapes making for loud complaints."
Greenspan also alleges shareholders weren't provided with key revenue data that would have helped them make a more educated decision at the time of the deal. "No one knew what the revenue of MySpace was," Greenspan says. "MySpace has hidden it from everybody."
Though he's among the most vocal, Greenspan isn't the only former MySpace investor disappointed with the sale to News Corp. "As a shareholder of MySpace, my strong preference would have been not to have sold the company," says Geoff Yang, a founding partner at Redpoint Ventures, which funded MySpace.com. Redpoint hasn't sued Intermix over the deal, but others have. Greenspan is among stakeholders who have sued Intermix and its representatives.
Several other people are participating in at least two separate lawsuits alleging everything from violations of proxy statements to an unfair sales process that prevented other companies from bidding for MySpace. They have big-gun lawyers backing them, including Lerach Coughlin Stoia Geller Rudman & Robbins, which won billions in settlements for plaintiffs in the Enron case. "Other than the Enron case, this is the largest case in my case inventory," says Darren Robbins, a partner at the firm. "This is the most outrageous transaction I've ever witnessed. Other cases pale in comparison." News Corp. is being defended by Skadden, Arps, Slate, Meagher & Flom, which represented The Blackstone Group in the acquisition of Freescale Semiconductor for $17.6 billion—the largest-ever leveraged tech buyout.
Indeed, M&A attorneys say News Corp. has taken on a lot of risk in acquiring MySpace.com—risks that had reduced the site's value. Besides many business model unknowns, Intermix was being investigated by New York Attorney General Eliot Spitzer for installing spyware and adware onto home computers unbeknownst to users.
While they'd agreed on a likely settlement in June, 2005, before the sale to News Corp., Intermix and Spitzer reached final settlement in the fall of 2005. According to the settlement, former Intermix CEO Greenspan—who left the company several years earlier—had to give up some $750,000 in profits. Intermix itself agreed to pay a $7.5 million settlement (see BusinessWeek.com, 5/5/05, "Spitzer's Spreading Spyware Net").
Many in the law profession, in fact, view postacquisition shareholder suits with a critical eye. "It's become more prevalent in the past few years to file a lawsuit almost immediately after a deal, [whether there are grounds for that or not]," says David Lipkin, a partner in the M&A group at the law firm of Cooley Godward Kronish, which helped eBay (EBAY) acquire hot Web property Skype. "It's become sort of a cottage industry."
Still, the bad news for News Corp. is: "It's very hard to get this type of lawsuit dismissed, to prevent them from going to trial," Lipkin says. Most companies end up settling the suits, with shareholders maybe getting a small sum and lawyer fees, he says. How the MySpace cases will play out remains to be seen. But they certainly promise to be a headache for Murdoch & Co. in the months to come, even as MySpace continues to grow and flourish.