M & A Law Prof Blog

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Boston College Law School

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Friday, September 7, 2007

MetroPCS's Takeover "motives"

Why M&A deals happen has been the subject of much study.  In the case of MetroPCS Communications, Inc.'s announced offer to merge with Leap Wireless International, there appear to be a number of rationales including synergies, cost-savings and the strategic one of creating a new, flat rate national wireless carrier with licenses covering nearly all of the top 200 markets.  But there may be another reason.  Here is a risk factor included in MetroPCS's S-1 filed earlier this year:

On June 14, 2006, Leap Wireless International, Inc. and Cricket Communications, Inc., or collectively Leap, filed suit against us in the United States District Court for the Eastern District of Texas, Marshall Division, Civil Action No. 2-06CV-240-TJW and amended on June 16, 2006, for infringement of U.S. Patent No. 6,813,497 “Method for Providing Wireless Communication Services and Network and System for Delivering of Same,” or the ’497 Patent, issued to Leap. The complaint seeks both injunctive relief and monetary damages for our alleged infringement and alleged continued infringement of such patent.

If Leap is successful in its claim for injunctive relief, we could be enjoined from operating our business in the manner we operate currently, which could require us to redesign our current networks, to expend additional capital to change certain of our technologies and operating practices, or could prevent us from offering some or all of our services using some or all of our existing systems. In addition, if Leap is successful in its claim for monetary damage, we could be forced to pay Leap substantial damages for past infringement and/or ongoing royalties on a portion of our revenues, which could materially adversely impact our financial performance. If Leap prevails in its action, it could have a material adverse effect on our business, financial condition and results of operations. Moreover, the actions may consume valuable management time, may be very costly to defend and may distract management attention away from our business.

The risk factor discloses a parade of horribles which could arise if Leap is successful in litigation.  Part of this is the nature of risk-factors, but despite the tendency of this disclosure to be over-dramatic there is always some truth in them.  With its offer, perhaps MetroPCS is looking to forestall a potentially adverse ruling by simply making a strategically sound acquisition thereby saving a few dollars.  I understand that the trial is scheduled for next August with a construction hearing scheduled for December.  If you can't beat 'em, buy 'em is the phrase; especially on the cheap -- MetroPCS's offer was only a four percent premium. 
Leap Wireless also responded to the offer today with the expected statement that they will now proceed to review it.  For those who read tea leaves, Leap has hired Wachtell, Lipton, Rosen & Katz, and Latham & Watkins, LLP as legal advisors; hiring Wachtell perhaps indicates they are spoiling for a fight.

http://lawprofessors.typepad.com/mergers/2007/09/metropcss-takeo.html

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