Counterproductive M&A Activity

In 2006 a significant TerreStar shareholder initiated a proxy battle to replace the Board of Directors in an attempt to reverse the course of the Company’s diminishing fortunes. During the proxy process the same allegedly conflicted management team proposed an ill-advised agreement between TerreStar and SkyTerra, a company for which Jared Abbruzzese had reportedly been a principal investor.

The transaction was structured to consolidate ownership and control of MSV and its general partner under SkyTerra. Ownership of TerreStar would then be consolidated under TerreStar (then Motient). (Source for preceding two sentences: Press Release from May 8, 2006) TerreStar’s board had attempted a similar scheme the previous year, but was openly challenged by shareholders, apparently enough so that management dropped the idea, at least temporarily.

Unfortunately for shareholders this second transaction was ultimately finalized. Much of the reasoning behind the transaction was alleged to have never been properly explained. For example, why was the Board compelled to sell TerreStar’s interest in MSV at a discount of nearly 33% to the price they were planning to buy SkyTerra’s interest in MSV in September of 2005 in the previously proposed transaction? TerreStar seemingly dismissed the prudent notion of buying low and selling high; their actions are alleged to reflect exactly the opposite. (Source for preceding two sentences: Press Release from May 24, 2006)

In addition to the agreement containing significant structural and economic flaws (such as no control premium paid for its MSV ownership and the incurred tax burden on TerreStar), management allegedly provided little credible evidence of a third-party valuation having been conducted. To make matters worse, the deal was entered into without stockholder approval despite the fact that the deal would radically and materially alter TerreStar’s business. The deal was also agreed upon in the middle of the proxy battle at a time when half of the Board of Directors had announced that they would not stand for re-election and thus would not face a stockholder referendum on their past actions. (Source for preceding paragraph: Press Release from May 24, 2006)

At the unfortunate center of all of these misguided actions was the steadily declining value for shareholders who reasonably should have been able to expect the leadership of TerreStar to act with their best interests at heart.

<<previous | next>>