Was MySpace Sold on the Cheap?

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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.

"COTTAGE INDUSTRY."

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.

Kharif is a reporter for BusinessWeek.com in Portland, Ore.