I hate to admit it, but I’m feeling a little foolish right now. Last week, I raised the question of whether or not Dish was researching a hostile takeover of TiVo. In my article, I concluded that they might try, but that they’d never be able to afford the $7.5 billion poison pill that came with it.
Since then, I’ve spent more time researching the pill and realize that I made a terrible mistake. Not only is there an antidote, but Dish may already have it.
Over the years, I’ve spent a lot of time thinking about this pill, but could never figure a way around it. It wasn’t until I asked myself a simple question, that the solution became so obvious. What would Charlie do?
Love him or hate him Dish CEO Charlie Ergen has a special kind of brilliance. His reputation as a fearsome litigator is legendary and more than once he has demonstrated his mastery for the fine art of negotiation. Over the years, his decisions have created huge growth for Dish (albeit at great risks.) Unfortunately, his penchant for the legal system may have finally caught up with him and now he finds himself struggling in quicksand with the prospect of having to buy rope from TiVo.
To get a better picture of his frame of mind, I turned to his own testimony from last February. (Via Mainer’s Law Library)
Q: Is the following an accurate statement, that Echostar would lose $90 million per month if it had to comply full with the terms of the injunction, assuming it’s properlty interpreted as requiring you to disable DVR functionality in the specified product lines?
Ergen: There would have been a time fame that, that would have been an accurate statement. Today that,
Q: Ninety –-
Ergen: Today it would be more than that. Today would be more than $90 million dollars
Q: And how much would it be a month today?
Ergen: Would be probably several hundred — It would be over several hundred million dollars, I don’t know exactly, I don’t have the figures in front of me, but it would be more today.
Q: Several hundred million dollars a month?
Ergen: It may be as much as several hundred million dollars a month.
I don’t know about you, but if I spent the last 30 years of my life building a business and all of a sudden was faced with the prospect of losing several hundred million dollars a month, it’s a good bet that I’d be willing to do whatever it takes to make sure that this doesn’t happen. I don’t care how big you are, after a few months, hundreds of millions turns into billions and after billions in losses vultures have a tendency to sweep in and pick off your carcass.
Even before we see how this plays out, S&P is already circling. From their June 10th assessment of Dish’s credit rating.
“With nearly $1.2 billion in cash and marketable securities and very moderate leverage for the current ‘BB-’ rating, Dish could easily fund the $103 million of new judgments and penalties without a ratings impact, it said. However, the longer term effect on the company’s credit profile would depend on the strategic path Dish takes to resolve the DVR issues, S&P said. If Dish were to enter into a licensing arrangement with TiVo, which S&P said was the most likely scenario, there would be no effect on Dish’s BB- corporate credit rating” [Note: Bold added by me]
If Mr. Ergen believes his own testimony, then his only frame of mind has to be one of desperation. He is left with only two solutions. He can try and negotiate a settlement with an empty gun or he can go for an all-in bluff and try to buy TiVo in a dangerous gamble.
Now I don’t know whether or not TiVo has actually refused to settle with Dish, but if they really are serious about enforcing their right to NOT license their technology, then Charlie really only has one option. In my opinion, I see TiVo digging further into the trenches. Take a look at Tom Roger’s comments from the Q3 2009 conference call as a good example,
We will pursue with great aggressiveness the resolution of these issues in a way that hopefully will lead to the imposition of the injunction but I just wanted to make clear that the right to appeal is not one without the ability of the court to handle this situation and bring it to ultimate resolution.
Or if you want to get a closer glimpse into how TiVo feels about the injunction, take a look at TiVo’s most recent argument for why Dish doesn’t deserve a stay of execution,
The right to exclude conferred by TiVo’s patent is empty if it can never be enforced. Since this Court entered its previous stay, TiVo has lost 25% of its DVR subscribers, while EchoStar’s have nearly doubled. Ex. 1 (Brunelle Decl. Ex. A). That harm can never be fully redressed through damages. Entry of yet another stay will undermine respect for district court process and severely prejudice TiVo.
further in their response,
EchoStar is a large, aggressive competitor, more than willing to pay damages (and face contempt charges) so long as it can continue to do as it likes Granting a stay here will distort the patent system by encouraging other infringers to make minor changes to their adjudicated products and then seek further stays in order to keep operating even after they are held in contempt. With deep-pocketed infringers, endless cycles of purported change and ensuing litigation will reduce the right to exclude to little more than a compulsory license—and one enforceable only through rounds of litigation that not only drain a patentee’s resources but allow rapidly-evolving modern markets to be shaped by infringing competition in ways that go far beyond monetary harm. [Note: Bold added by me]
The more that I look at things from Charlie’s perspective, the more it becomes clear that he doesn’t have a choice in this scenario. He must buy TiVo. The future of his business would depend upon it.
This leaves just two questions, how much can he spend and how does he do it? If Dish currently has $1.2 billion in cash and short term securities, it would give them enough firepower to easily get 50% at recent market prices, but it wouldn’t be enough to pay for the poison pill.
Dish could probably raise another $2.5 billion before their debt would start to get too expensive, so for the sake of argument, let’s say that their budget is around $3.5 billion. When you consider TiVo’s tax losses, their cash on hand, and what Dish actually owes them in licensing fees (plus punitive damages), they’d probably really only end up paying $2.5 billion to make this acquisition happen.
So if Charlie came to me and said, Davis here’s a pile of money I want you to engineer a hostile takeover, here’s how I’d do it:
What about the possibility of TiVo buying a hobbled Dish? If the poison pill is effective and Dish’s coffers run dry, this seems like a possible scenario.
This is much more complex than any legal experience (read: none) that I have. But being a lay person with a Series 3 (and therefore interested in TiVo surviving), I have a few questions:
1) Will (or can) TiVo settle to be bought for less than this poison pill? How have other companies dealt with poison pill buy-outs, I guess, is the question.
2) If the court says no more stays and resolves all in TiVo’s favor, what is the total (damages + license fees?) Dish would have to pay? Is that easier to swallow than the poison pill? I can’t imagine a scenario where Dish would disable their STBs. That would sink them.
Seems to me like these companies should get together regardless — they each have something the other wants. For Dish, it’s patents and another well-recognized brand to extend their portfolio (imagine a Sling-loaded Dish Network TiVo, and how awesome that would be), and for TiVo, it’s cash. How many profitable quarters has TiVo had at this point? Even if the patent case is in favor of TiVo, it won’t stop the tide of provider DVRs, and TiVo still has to innovate to keep a subscriber base (something they’re really terrible at). A Dish-TiVo merger makes complete sense and would be beneficial to pretty much everyone…except maybe DirecTV.
I wonder how this would work out…..remember Tivo has deals in place with both Comcast and DirecTV. I wonder if both those partners may fight hard and even fight back with money to make sure Dish doesn’t gain control? I have no idea how it would all end, I just think other partners might fight hard to not let Dish gain Tivo.
They’d probably be ok with it if it was a neutral party, but you’re right that they’d fight tooth and nail to keep a competitor like Dish from getting a hold of them. Since Comcast and DirecTV also have poison provisions written into their partnership agreements with TiVo, it would make it tough for Dish to argue that they would be doing TiVo a benefit by trying to buy them.
In bankruptcy court, TiVo’s creditors will certainly grant Dish a license. All Dish has to do is “stay” long and often enough.
until the other DVRs like DISH 722 are declared infringing this is all idle speculation. Much as I use TiVo and think DISH despicable for the way it does business and uses the courts – I do not see that as anywahere near a lock. Plus you need to do a bit more about the poison pill.
TiVo is the only major standalone DVR maker out there – would the SEC allow such a hostile takeover?