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NorthPoint's David to Verizon Goliath
By Thom Calandra, FT MarketWatch.com
Last Update: 3:18 AM ET Dec 11, 2000
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LONDON (FTMW) -- When lawyers enter the room, anything is possible.
We're talking not elections but NorthPoint Communications Group (NPNT: news, msgs) , the San Francisco company whose merger with Verizon Communications (VZ: news, msgs) blew up. NorthPoint is seeking $1 billion in damages against former suitor Verizon Communications, which pulled the transaction when it saw a "material adverse change" in NorthPoint's flagging business -- the provision of high-speed copper lines for Internet access.
NorthPoint has already received $150 million from Verizon Communications, which had been seeking to merge its DSL operations with NorthPoint. Verizon, before it killed the transaction, was promising another $800 million in exchange for 55 percent control of the tiny NorthPoint. Digital subscriber lines use copper phone lines but are under assault from cable modems and what seems like waning interest in broadband services.
Bargain hunters
At 40 cents a share, NorthPoint's $55 million market capitalization could attract bargain hunters who see merit in the lawsuit, which seeks $1 billion in damages. After all, Verizon carries a market cap of $150 billion, or twice that of AT&T (T: news, msgs) . Verizon has yearly sales of more than $60 billion and has largely been immune to the tech and telecoms sell-off this year.
Verizon is the result of the merger of Bell Atlantic and GTE.
The key to the NorthPoint suit could be the material adverse effect clause in the merger pact, which fell apart last month. The legalese goes like this:
"Material adverse effect means in the case of NorthPoint or Parent, any fact, event, change or effect having, or which will have, a material adverse effect on the business, operations, properties (including intangible properties), financial condition, assets or liabilities of NorthPoint or Parent, as the case may be, and its Subsidiaries taken as a whole, but shall not include facts, events, changes or effects that are generally applicable to (A) the data industry, (B) the United States economy or (C) the United States securities markets generally or the Nasdaq Technology Index in particular, nor shall it include any fact, event, change or effect caused predominantly by Verizon's involvement in the transactions contemplated by this Agreement . . ."
Small shareholders are hoping NorthPoint prevails in the lawsuit, which was filed in San Francisco Superior Court. "If English is still English, Verizon cannot back out of the deal," a shareholder, Kenneth D. Jacobs, told me. "Of course, lawyers have been known to find meanings contrary to Webster's."
Suit for suit
Verizon already is asking another court, in Delaware, to support its right to end the merger pact. Verizon has said it invoked an escape clause in the August merger "because of the deterioration of the business." NorthPoint restated its quarterly sales several weeks ago, eliminating $6 million of revenue after the company discovered delinquent accounts for its high-speed DSL lines. The delinquencies were from Internet service providers that have dwindling capital with which to pay for NorthPoint's services.
Such flagging accounts could be a sign of waning interest in high-speed Internet access, which then might be taken as a trend for the data industry under the material adverse effects section of the merger pact. Or so NorthPoint shareholders, and speculators, hope.
Each day, anywhere from 3.5 million to 30 million shares of NorthPoint change hands. To be sure, the volume represents at current levels only a few million dollars a day. Brokerages and Nasdaq market makers in this case are the sure winners.
Verizon needs plenty of cash to continue as a going concern. Analysts at Deutsche Alex. Brown, before NorthPoint filed the lawsuit, called the situation "grave".
The company has about $500 million in debt and lease obligations and likely will lose $110 million in the fourth quarter, the analysts said. The clock is ticking.
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Thom Calandra is editor-in-chief of FTMarketWatch.com and CBS MarketWatch.com. |
