Monday, March 23, 2009

Has Greenmail Come to Bridgewater Systems?

Since last fall, Ottawa's Bridgewater Systems(or, at the least, some of its stakeholders) has been resisting the advances of New York hedge fund Crescendo Partners. In the current impaired market, where some companies are trading below book value, who wouldn't?

Still, with stakeholders that include strategic investors (Alcatel-Lucent) and VCs, there are bound to be some investors whose own business agenda would favour near term liquidity, even if it comes at an artificially low price. How does a company best keep these investors from siding with the proposed hostile acquirors?

By buying back their shares (and their votes) before an acquiror can, which is what Bridgewater intends to do through the normal course issuer bid it has launched to purchase up to 5% of the company's current float. While the buyback offer has been extended to all shareholders, this move is often made to clear out those who may cause problems at any shareholders meeting, such as the one requisitioned by Crescendo for later this spring.

Do lingering VCs and strategic investors, who do not liquidate all of their holdings when a company goes public, maintain a disproportionately large say over the business post-IPO, and/or increase the need for share buybacks? It does seem to be one of the challenges inherent in becoming a publicly-traded microcap or small cap while still in early growth mode.

In California, the term "greenmail" has been revived by pundits to describe efforts in the current market by founders and VCS to force a company (or allied company or individual) to buy back their stakes. There's nothing illegal about greenmail in general, or VC/founder greenmail in particular. But it is an important dynamic for boards to factor into their own strategy for dealing with a predatory market, where hedge funds are looking to buy into solid, undervalued opportunities.

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