Shareholders Sue To Stop Google's Purchase Of On2
Google (NSDQ: GOOG) is offering a 57 percent premium to purchase video firm On2 Technologies—but that's not enough to satisfy a cadre of On2 shareholders, who are suing to block the deal. Investors say there's “no evidence …
Context & Ripple Effects
Google announced its plan to acquire On2 Technologies just over a week ago (August 5, 2009), pitching a 57 percent premium for the video codec firm whose compression technology underpins much of the web's embedded video. The suit reported today is the first organized resistance to those terms: On2 shareholders argue there is 'no evidence' the price captures the company's value.
The litigation also extends Google's familiar run-in with courts over video. The company was sued over clips on its sharing site as early as November 2006, and Viacom filed its high-profile copyright complaint against YouTube in March 2007. Where those disputes were about content rights, this one is about price — a different kind of legal exposure, but one that lands on the same acquisition.
First-order effects
- On2's board now has to defend a deal signed eight days ago against its own shareholders in court, while Google's integration timeline for On2's video technology is hostage to the outcome of the litigation.
- Shareholders pressing the case effectively force a re-examination of the 57 percent premium, putting upward pressure on the deal price or its structure before closing.
Second-order effects
- Other On2 holders gain leverage from the lawsuit even if they did not file it — a vocal minority raising objections typically becomes the bargaining wedge for improved terms from an acquirer that wants certainty of close.
- Boards of other small public tech companies being courted by large acquirers face sharper scrutiny of their sale processes, since this suit hands dissident shareholders a template for contesting 'insufficient' premiums.
Third-order effects
- If the pattern holds, merger-related litigation becomes a routine cost of acquiring small-cap technology firms — acquirers like Google would need to either raise headline premiums or budget for proxy fights and suits as part of every deal.
- The dispute also feeds the broader structural question of how strategic buyers price scarce video infrastructure assets, where a handful of codec and platform companies control technology that large internet players cannot easily replicate in-house.
The trend: Minority shareholders are using litigation rather than proxy votes to force repricing of small-cap technology takeovers, making deal premiums a negotiated legal battleground rather than a boardroom formality.