Last Thursday afternoon, Patricia C. Trinchero wrote the following:
"After reading the Phoenix thread, I have another idea as to why Gordon might have left himself the possibility to all those shares........to keep someone like Soros from buying up the company and ruining it like he did with his shenanigans in Phoenix. This way Gordon can stop a takeover by market forces that could be hostile..........by the way Soros is no philanthropic knight in shining armor. His corp would swallow us all whole and never even burp! Just like he did to the Phoenix shareholders."
I will blatantly steal Pat's idea and ask the following question: is Gordon using the Revolving Credit Loan Agreement (RCLA) as a type of "poison pill" to ward off a hostile takeover? [A poison pill refers to a company's making a large number of shares available at below-market prices which greatly raises the price of a takeover.]
Arguments leading to the answer "yes"
1) Regardless of intent, it appears that the RCLA could dramatically raise the price of a hostile takeover. What would a takeover cost? How many shares would they have to have? Let's say they would need a voting majority of the outstanding shares (50% of 80 million is 40 million shares). If we assume they would have to offer $.50 per share, it would take $20 million to take control of the company. If Gordon quickly loaned the company $5 million and converted the loan into shares at $.15 (which would require the approval of the Board of Directors who personally would have a lot to lose), Gordon's shares would increase by 33.3 million. Half of those shares at $.50 per share would raise the cost of the takeover by $8+ million. So the cost of the takeover has gone from $20 million to $28+ million, all for a company that has a current market capitalization of $22 million. If the stock price were higher, and the tender offer were higher, the increased cost of the takeover would be correspondingly higher.
2) In conversations with Paul Henry, he has made numerous references to "bootstrap financing" and finding a "credible financial partner" who would take a slice of the company. Henry has said that if the company seeks this financing too early (meaning stock price is too low), the partner takes too big a slice of the company, has too much voting power, and too many seats on the board. If, however, they can limp along with their bootstrap financing, have the stock price react positively to company developments, then the financial partner receives a smaller portion of the company. So while this conversation was not specifically about the RCLA, it is evident that Henry (and probably Gordon) has concerns about losing control of the company.
3) Paul Henry has said that the RCLA would only be utilized as a last ditch effort financing, one that he says is highly unlikely to be used. He knows it makes the 10K look bad, but Gordon is apparently unwilling to give it up. This scenario makes a lot more sense if Gordon is using the RCLA for protection against a hostile takeover.
4) Gordon lost Phoenix to Soros. It has happened to Gordon before. It stands to reason he would institute safeguards to avoid the same thing happening again.
5) The RCLA is the most incredible document! It goes on pages upon pages. It must have take a team of Philadelphia lawyers 6 months to write this thing up. All of that for a measly loan agreement? Or did Gordon intend more?
Arguments leading to the answer "no"
1) Gordon did actually exercise the conversion rights in the agreement in February, 1999. There is no takeover that I am aware of. If the RCLA was intended to be a poison pill, it was also intended to be a loan agreement.
2) The RCLA makes the 10K look terrible! This is quite a price to pay to ward off takeovers.
3) Wouldn't a more conventional poison pill be preferable to the RCLA?
4) Why doesn't management explicitly state that the purpose of the RCLA is to ward off hostile takeovers?
Obviously I'm no expert on this subject; your comments are welcome. Thanks to PatT for the idea. If the thread shoots big holes in this theory, it's even more important to remember it was PatT's idea!
Regards, Suzanne
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