Premisys shareholders burning Zhone
By Lawrence Aragon and Julie Landry
Redherring.com
October 23, 1999
For Zhone Technologies, what looked earlier this week to be a grand debutante ball turned into a nasty war of in-laws.
The latest chapter in Zhone's comedy of errors is vociferous outrage by shareholders of the company it plans to acquire, Premisys Communications (Nasdaq: PRMS). If enough shareholders come out against the deal, the deal could be derailed.
That would be a black eye for Zhone, founded by former top executives of Ascend -- CEO Mory Ejabat, chief technology officer Jeannette Symons, and chief financial officer Robert Dahl. After the stunning success of Ascend (sold to Lucent Technologies [NYSE: LU] for $20 billion in January), there was great anticipation for the team's next startup. Mr. Ejabat declined to comment on the turn of events.
Why did Ascend's founders invade Premisys?
Ascend founders got stood up for $500 million.
Sycamore Networks's IPO was a barn burner.
Zhone on Thursday morning announced plans to purchase Premisys for $240 million in cash. To finance the deal, the company was expected to announce the same day an impressive $500 million round of funding. However, as of Friday evening, the funding still hadn't been finalized, and now Premisys stockholders are fuming on message boards about the tender offer of $10 per share, which they deem "too cheap."
Premisys's stock price floundered for the past year, rarely popping above $10 a share. A recovery seemed to be on the horizon in the wake of an upbeat quarterly report from the company, however. Its revenues rose 42 percent to nearly $22 million in the quarter ended September 30, and it posted profits of $517,000, bouncing back from a loss of $1.3 million in the prior quarter.
WHAT'S THE RUSH?
Although Zhone's offer was priced at a slight premium over Premisys's closing price of $8.68 on Wednesday evening, stock analyst and Premisys shareholder Michael Murphy called it "a terrible deal." "We're not tendering our shares and we're not coöperating," grouses Mr. Murphy, editor of the California Technology Stock Letter.
Mr. Murphy says he spoke Friday morning with Premisys stockholders who represent a combined 20 percent of the company, and all agreed it was a bad deal. If he can get another 6 percent to oppose it, the deal will be nixed, he says. If need be, Mr. Murphy says, he will file suit against the company and its board to stop the transaction.
Mr. Murphy and his mutual fund together only own about 12,000 shares in the company. What he's really angry about is that he's been recommending the stock as a strong buy to his 6,000 newsletter subscribers for the past year. "CTSL subscribers own a huge amount of the stock," he says. "I told them [in the CTSL issue published Friday], 'Don't tender and don't sell.'"
What Mr. Murphy and other shareholders are most concerned about is the apparent urgency on the part of Premisys's board to sell the company. It still has $84.4 million in cash and cash equivalents in the bank, it has no long-term debt, and it has been profitable for the past five years. Additionally, the company has $100 million in working capital and assets totaling $127 million.
At least two of Premisys's institutional investors, T. Rowe Price (Nasdaq: TROW) and the State of Wisconsin Investment Fund, do not plan to tender or sell their shares, according to a source close to the companies. Those two investors together own 14 percent of the company.
Other institutional investors did not return calls for comment. They include Zweig-DiMenna Partners, Columbus Circle Investors, and Putnam Investments, which together own another 30 percent.
WHERE'S THE LOVE?
Individual shareholders made their frustration evident on stock discussion boards and in comments shared with Redherring.com. "It is clear the stockholders and employees, many with lots of underwater options, were of no concern to the likes of [Premisys CEO] Nick Williams or others on the board," says Mark Hansel, a Premisys shareholder and former employee who now works for Gadzoox Networks (Nasdaq: ZOOX). "Clearly these people stand to make out well on this deal and to be rewarded for what is mediocre performance at best."
Shareholder Don Farr says he's unhappy with the proposed deal, claiming that Premisys turned down a buyout last year worth $19 per share. "I don't believe [Mr. Williams] has been forthright with the owners of this company," says Mr. Farr. "If Premisys is really worth more that $10 a share, I would think that another company would consider making a higher bid. This has happened very quickly, and I am suspect of management's motives."
Premisys CFO John Hagedorn says the company is aware that certain shareholders, large and small, are unhappy with the offer amount and have threatened not to sell their shares. But he says, "Whether they really will or not, nobody really knows." He adds that he does not believe the dissenting shareholders are in the majority.
Investor unrest after an acquisition announcement is nothing new, says Nell Minow, a shareholder activist with Lens Investment Management. She says that shareholders always protest the offer price, and file lawsuits that are seldom a serious challenge. "It's a huge, expensive mess to try to stop something like this," Ms. Minow says. She notes that action with even a fighting chance would depend on involvement of the biggest institutional investors, and even then the struggle only results in driving the price of the deal up a few dollars per share.
But Mr. Murphy believes all of the unrest will lead to another buyer coming to the table, which will result in a better deal for shareholders. It is likely that Premisys customers Lucent or Nortel Networks (NYSE: NT) could swoop in and buy the company, he says.
Some Premisys shareholders liken the proposed deal to one that Mr. Ejabat pulled off at Ascend. Ascend bought ATM switching company Cascade Communications for a relatively cheap $3.7 billion in March of 1997, and sold the whole operation off to Lucent in January of this year for $20 billion.
Cascade's founders were unhappy that Mr. Ejabat was able to turn such a profit from the Cascade acquisition, and, according to Silicon Valley lore, later founded a company whose name reportedly means "sick of Mory." That company is Sycamore Networks (Nasdaq: SCMR), the optical switch manufacturer whose IPO Friday set a Wall Street record by opening 600 percent above its offering price of $38.
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