In Reel Time

2010.44 The Web is dead? Is Wired right or just good at headlines?

I’ll go with the headline option as the other point is nuanced.

The article in question starts with “Who’s to blame?” Chris Anderson takes the ” us” argument with Michael Wolff blaming “them”. The title on the cover, asking whether the Web is dead, is clearly an attention getter, but the related articles are very thoughtful.

What points stuck with me – for those who haven’t read the article (and those who did and may want to discuss related thoughts). I’ll break my argument up by discussing Anderson’s points first.

Anderson is making a distinction between closed systems on the Internet and the Web itself. We have moved over the past few years from search engines and the broader web to semi-closed systems such as Pandora and Facebook. The screen comes to the user, not the other way around; so these systems often provide a better experience. He also resurrected the “push” concept which I remember so clearly when first discussed in the mid to late 1990’s. Now push comes in the form of APIs, apps and the Smartphone.

Content delivered via browser currently only accounts for a quarter of Web traffic and the number is still dropping. Increasingly traffic consists of peer-to-peer file transfers, email, company VPNs, the machine-to-machine communications of APIs, Skype, World of Warcraft and other online games, Xbox live, iTunes, VOIP phones, iChat and Netflix movie streaming. Shifts are accelerating and Anderson quotes Morgan Stanley as saying that within five years the number of people accessing the Net from mobile devices will exceed those using a PC. Phones have a smaller screen; traffic is often accessed not through a browser but specialty software (a closed or semi-closed system).

Results? A pressure for profits from these “walled gardens” and monopolies. Ah, monopolies. Networks are more monopoly prone, Anderson claims; using Metcalfe’s law, that the value of a network increases in proportion to the square of connections, a winner takes all market is created. As Facebook’s user base grows more people are drawn to it because that is where they can find the largest number of their friends (and they miss out if they aren’t thus connected).

The victory of convenience over openness? People are often choosing quality over free, yet also appreciate choice. Some watch content and others create it.

According to Anderson, “The Internet is the real revolution, as important as electricity; what we do with it is still evolving.”

To sum up some of Wolff’s key points, online power blocks are real due to concentrated user numbers. He references some statistics from Compete, a Web analytics company, which says that the top 10 Web sites accounted for 31% of US page views in 2001, 40% in 2006 and about 75% in 2010. Big dominates; and those related companies control enormous numbers of people.

An example he sites is Google, who he analogizes to being like the only movie distributor, who also owns all of the movie theatres. Google may stand for open systems and level architecture but it also heavily dominates its space. Disruptive business models and the breakdown of incumbent power structures are only one part of the Web. Struggles for control are another.

Content companies had to face their own disruption online. Wolff points out that the Web was built by engineers and not editors. HTML-constructed Web sites aren’t the best as an advertising medium. While growth initially masked the resulting revenue generation crisis it has become clear to all now. Ads can be tracked online but we also know how many consumers ignore them.

Wolff states that the online audience is a fraud. He says that nearly 60% of people find websites from search engines, driven by search engine optimization (skewed results based on the related algorithm). And, as Web audiences have gotten larger, the quality of those audiences has dropped. Hence companies such as DemandMedia produce ever cheaper content for audiences that don’t want to pay for it (a spiraling that leads to less and less valued content).

Those coming from the media side don’t typically know technology and vice versa (as an aside, I recently met the CEO of a local tech based content distribution company who made movies before going to grad school – I was thrilled). But then Wolff brought in Steve Jobs…who aligned himself with media interests and found one solution.

Further points are to be found in the pages of Wired Magazine’s September issue

George Gilder, in his newsletter dated Friday, August 27 titled “Wired Weirds Out”, criticized the Anderson/Wolff articles. (Free sign-up at http://earth.lyris.net/cgi-bin/lyris.pl?join=gilder-technology-report). I’m never one to easily argue with George Gilder! I think the essential disagreement with the respect to the two positions is that Wired gave the walled gardens too much credit for displacing the broader web. Gilder points out his nuance: the massive growth of usage/traffic and credits the online world with killing TV and the Internet. Essentially, the network needs to meet the continued increases in demand (and type of traffic) and no solution has thus far come forward (who pays…who controls the network…neutrality or not?). He also criticizes Wired for its extensive name dropping of media darling companies – and he’s right on that point.

All three pieces are worth reading. Gilder’s focuses more on the actual technology; the Anderson and Wolff pieces are more thought pieces – hence the attention getting title. Viewed in sum, we get insights onto the evolution of an industry – digital media – which continues to evolve. We may all be surprised with the results of that evolution.

2010.41 LAVA Los Angeles Venture Capitalist Breakfast

Earlier today I was at the Skirball Center listening to a panel of (thankfully) outspoken and even blunt venture capitalists: Jim Andelman of Rincon Venture Partners; Kevin Jacques of Palomar Ventures; Klaus Koch of Vicente Capital Partners; Sumant Mandal of Clearstone Venture Partners; and Mark Suster of GRP Partners. Stephen Hughes of Silicon Valley Bank and Scott Alderton of Stubbs Alderton & Markiles moderated. I won’t attribute remarks to an individual unless it pertains to a difference in their fund or distinctive (and perhaps not universal) viewpoint.

Among the opening questions was one that got to the heart of the matter: are venture capitalists going away? No, but the industry has changed with many funds (and the industry overall) posting negative returns for the past ten years. There is less money going into venture capital, thus smaller funds and fewer VCs. The funds in northern California are often larger than those here in Los Angeles. Practically, this means that local VCs invest smaller totals into their portfolio companies. And, while venture investing amounts in Los Angeles are up over the past six months – especially relative to other parts of the country – deal numbers are up less dramatically. Additionally, many of the larger investments in southern California have not been made by local VCs (Demand Media and Gravity are two examples). The costs required to start an Internet based business have declined so much that some businesses in this sector are profitable after spending less than $100,000. Since one local pool of talent comes from the media world and often starts such Internet businesses, VCs can often see a working business – with a proven concept – before they need to invest.

Returns are an expected topic and really what enables VCs to raise subsequent funds. Typically, for an early stage investment the VCs agreed that they want a ten times return; which would make up for the inevitable lesser performers. A lower risk, lower return wasn’t of interest as it damped overall returns and the money couldn’t be deployed into potential home runs. For a late stage business (clear monetization and diverse customer base) a three times return was the minimum required and they expected most of these companies would continue their high growth (75 plus % surviving). Total invested over the life of the company ranged between $6 and $25 million.

The IPO market remains somewhat weak so most exits are currently company sales and the lower returns they entail. Hence, when characterizing who should take venture money one criteria stated is that your company should be the type that other companies are interested in buying. Lots of larger companies are looking to acquire (innovation). The company should also be quickly scalable and have a good use for the added resources.

One much discussed topic was how to approach VCs. Mark Suster made a strong point that in this day and age of social networking there is no excuse for any entrepreneur not to manage to find someone who could make an appropriate introduction: ideal is from an executive at a VC portfolio company, next another entrepreneur who knows the VC and third is from advisors who know the VC. Kevin Jacques clarified that an introduction was not the forwarding of a business plan from a random connection on LinkedIn but rather someone who knows the industry and had done work with your company to help guide or mentor you.

And, research (Crunchbase; SoCalTech; Internet) which VCs invest in your type of company, are actively still investing and are the right size/stage. Not doing the requisite work is proof that you aren’t a real entrepreneur.

Power point slides are easier to read than Word documents for someone buried in hundreds of business plans.

The B round was referred to as a “sucker’s round” with fewer VCs willing to do a B round, especially if A round investors weren’t continuing to fund the company. During the 2008 crash VCs were too busy with existing portfolio companies (figuring out who to continue funding and who to let die) to take on anyone else’s mess – the B round. Angels likewise pulled back in 2008 as they worried about their own cross-platform investments. Slowly the angels are coming back but the B round investors aren’t.

So think clearly about which VC money you take (they should be the type who sticks by their portfolio companies for that B round; for the C round your concept is either working or not and funding will depend on that factor). It’s easier to get a divorce than exit this type of partnership, said Jim Andelman. Look at the investment as the beginning of a partnership and not just funding.

Eventual percentage ownership they’d like at a liquidity event ranged from about 25% to 50%; but really varied based on the stage they had invested and whether other investors were involved.

Overall, they were very upbeat about innovation in Los Angeles today. While the talent pool may not equal Silicon Valley’s in some ways other attribute of our local community and talent pool make up much of the difference.

For details on their varying investment types, the industries they favor, fund size and background please do the research. That is what a real entrepreneur would do.

And email me for more details on the panelist’s comment; I took many notes but aim to keep these postings short.

2010.39 Francisco Partners makes firm offer for Grass Valley Broadcast business

In January 2009 Technicolor announced that it would spin off its Grass Valley business in its entirety. 18 months later, in July 2010 Francisco Partners has made a binding offer for the broadcast business only, and Technicolor intends to divest the transmission and head-end units separately.

Grass Valley’s broadcast business is a leading provider of video creation and video management equipment for broadcasters and teleproduction companies. As of June 30, 2010, the business unit had 1,457 employees in 23 countries. Revenues were about 272 million Euros for 2009 with an operating loss of approximately 52 million Euros. During 2009 the broadcast division made up 72% of total Grass Valley revenues and 59% of its operating loss; so the other Grass Valley businesses aren’t doing well either.

Per the deal announcements the broadcast business is valued at US$100 million. However, in reality the valuation is nowhere near that, and Technicolor is not receiving any cash; in fact, they are bringing cash to the closing. A promissory note of $80 million with a six year maturity and capitalized interest of 5% will be issued to Technicolor. Technicolor will also provide 20 million Euros of cash to support the business. Additional consideration may accrue to Technicolor based on future results, (i.e., an earn-out). It has not been publicly announced how much capital Francisco Partners is investing in the company.

All assets and employees of the Broadcast business are included, as are patents and license agreements in the professional broadcast equipment space. Active employee retirement liabilities are transferred to the acquiring Newco.

The transaction is expected to close by year end (subject to final agreement and regulatory approval).

Francisco Partners, with nearly $5 billion in capital, is among the world’s largest technology focused private equity funds. Partner David Golob is quoted in online reports of the deal.

Technicolor is attempting to refocus its business around its content creator and network service provider customer base. Having been in business for over 95 years the company is clearly trying to proactively react to cataclysmic changes in its business model. Historically, they have been providing production, postproduction and distribution services to content creators and distributors for entertainment, software and gaming customers. Technicolor is an industry leader in film processing and DVD manufacturing and distribution (a business decimated by industry evolution). They also provide set top boxes and gateways, and operate an intellectual property and licensing business.

No cash upfront after eighteen months on the market? Clearly not the easiest offer to muster. But Francisco Partners is also taking on some industry challenges. Not only does the broadcast industry remain challenged and capex budgets likely more frugal going forward, but the growing significance of IP-based video in professional as well as consumer applications means that Grass Valley’s business will increasingly be coming into contact with technology leaders such as Cisco and EMC.

2010.38 Carl Icahn Sues Lions Gate and Rechesky over Debt to Equity Deal: Why Good Advisors Matter When Contemplating M&A

The ten-day truce between Carl Icahn and Lions Gate management is very clearly over.

Icahn has let it be known that he doesn’t support the merger discussions between Lions Gate and MGM.

On July 20, Icahn also launched a new takeover offer for Lions Gate common stock at $6.50 per share, lower than his previous $7.00 offer. The offer is contingent on management not entering into a major transaction outside the normal course of business. The tender offer will expire August 25; Icahn will then nominate a slate of directors to replace Lions Gate’s current board. The election will occur at the company’s annual board meeting; most likely in October.

Lions Gate, in an effort to reduce debt, issued common shares at $6.20 per share to retire $100 million in convertible debt, the stock price represented a 2.8% premium to Monday’s share price. Icahn’s holdings were reduced to about 33.5% from 37.9%. The move doesn’t only dilute Icahn; it dilutes all existing shareholders. The 16.2 million new shares went to Mark Rachesky (MHR Fund Management), who already held almost 20% of the company’s common shares; his percentage is now 29%. The debt, due in 2026 and 2027, was acquired from Kornitzer Capital. Kornitzer also owns a small number of Lions Gate shares which he hasn’t tendered to Icahn.

Icahn must now acquire almost another 17% of shares to accomplish his takeover goal – assuming that management doesn’t convert more debt to equity.

This morning Icahn filed a law suit in New York state court against Lions Gate and Mark Rachesky seeking damages, an injunction rescinding the debt-to-equity swap and the prohibition of the defendants from voting their shares in a vote to elect directors. Icahn also filed a petition to the Supreme Court of British Columbia – a hearing to be held on Wednesday – regarding whether to grant orders against Lions Gate and Rachesky. Both sides are engaging in some general public mud slinging; the specifics of their accusations won’t be covered herein.

The battle continues. Lions Gate stock closed at $6.90 today, July 26.

The fight over Lions Gate reflects the importance of good advisors. Both sides are now exploring creative transactions and strategies to ensure that the outcome of this M&A battle is in their favor. Clearly the bankers and lawyers involved are working hard on behalf of their respective clients.

2010.37 Imax to partner with Laser Light Engines

IMAX, which specializes in immersive motion picture technologies, recently signed a deal with Laser Light Engines for development of high brightness technology systems exclusively for IMAX digital theatre systems.

Under the terms of the agreement, IMAX will make an equity investment (of undisclosed amount) in Laser Light Engines; who in turn will develop a custom version of its laser light technology for exclusive use in IMAX digital projection systems. Laser Light Engines will also develop custom features to help enhance the IMAX experience. Additionally, LLE’s technology won’t be available to the general market for two years, and to other large format theatre systems for three years.
Laser Light Engines designs, develops and manufactures OEM laser-driven light engines that provide high brightness, long lifetimes, energy efficiency and color control capabilities.
One particular challenge of theatrical 3D is that the viewer’s 3D glasses filter out a significant percentage of the available luminescence as they “trick” the mind’s eye into seeing a 3D image. That means that a brightness that is adequate for 2D viewing is insufficient for 3D exhibition, and many viewers consider 3D movies to be too “dark.” This challenge is the backdrop for IMAX’s interest in LLE.

IMAX screens typically go from floor to ceiling, and extend to the edge of viewers’ peripheral vision, which creates an immersive experience. Their sound system is of exceptionally high quality. The company’s 3D theatres even further increase the viewers’ feeling of immersion. Most IMAX theatres feature a steeply inclined floor which allows each audience member a clear view of the screen.

The deal is subject to due diligence.

IMAX has had a busy year thus far in 2010 – quickly signing up deals to open new theatres around the globe. Most recently, on July 15 they announced an agreement with Lumiere Pavilions, one of the fastest growing private movie exhibition chains in China, to open three new theatres, one a year starting in 2010. This deal brings the total number of IMAX theatres scheduled for operating in China by 2012 to 57. The total number of IMAX signings announced this year is 95, as compared to 35 systems during 2009. And the mix of openings signed spanned the globe with sites to include Japan, the Philippines, Thailand, Singapore, Russia, the Ukraine, Croatia, France, the Netherlands and the UK. They have also expanded an earlier agreement with AMC by adding 15 to 25 more theaters to the original 104 agreed upon.

Inception, which opened on a record 197 IMAX screens over the past weekend, was also the top grossing picture, taking in $60.4 million.

The company will announce earnings on July 29.

2010.35 Different M&A bidder types; as demonstrated in recent content library-related announcements: Miramax, Lions Gate, MGM, EMI and the Weinstein Company.

A slew of recent media-related deals and announcements has me wondering. Blogs have reported that Colony Capital is teaming up with Ronald Tutor to buy Miramax. While Colony is known as a real estate private equity fund, it started out buying distressed assets during the S&L crash. Richard Nanula, a Colony partner, was Disney’s CFO years ago so he probably grasps studio economics as well as anyone. Also as covered here before, Carl Icahn – known as a corporate raider – is making a run at Lions Gate. Lions Gate is reported to be in talks with MGM about a possible merger. MGM’s debt holders, in turn, reportedly rejected a $1.5 billion bid from Time Warner. EMI’s owner, private equity firm Terra Firma, invested an additional £105 million into EMI to avoid a default on the music company’s debt; if the bankers hadn’t gotten paid they could have taken over EMI. The Weinstein Company recently negotiated a restructuring agreement in which its lenders are relieving it of $450 million in debt and providing new cash in exchange for a $115 million payment from Ambac and the rights to 200 Weinstein movies, including the $233 million in related accounts receivable (Once Goldman and Assured Guaranty recoup their money the film titles will revert to Weinstein).

What do all of these (possible) transactions have in common? All of the related companies have content libraries; their valuations are functions of both legacy assets and in some cases efforts to create new content. Lenders are also having an impact on deal negotiations. Lions Gate and Weinstein’s lenders have been working with them to give them time to address their business issues, while EMI’s lenders (led by Citigroup) have been more aggressive in their willingness to potentially take over the company. In all cases, investors and debt holders are assigning value to libraries of content (music in the case of EMI, film content otherwise).

What they also have in common is that a wide range of buyers is demonstrating interest in these content library-based businesses (potentially including existing debt holders).

So, the using these transactions to illustrate the types of buyers common in M&A transactions and depending on circumstances:

Strategic buyers: Strategic buyers are essentially other corporations, most typically in the same or a related business. MGM and Lions Gate – should one buy the other – are examples.

Financial buyers: most typically private equity firms. They buy businesses that have enough stable cash flow to support the addition of debt (added to leverage their investment and, hopefully, their return). Their goal is to run the company better than the prior management team and sell a few years down the road at a profit.

Distressed investor: comes in when they think an asset is (generally grossly) underpriced. Defaults on debt, market turmoil (and an overreaction with respect to valuations which plunge as the panicked or illiquid dump related assets), bankruptcies and predictions of gloom are all signals. Colony Capital made its name buying distress bank and commercial real estate holdings.

Corporate raider: targets a company whose publically traded equity he believes is undervalued. The raider then pressures management to make certain changes in an effort to raise the share price. Carl Icahn made his name as a corporate raider. The goal is typically to turn a quick profit.

White knight: What Lions Gate is likely looking for. A white knight is a bidder who comes in and usurps a corporate raider – typically by working with management to come up with a higher or more favorable bid. Example? None thus far in any of the transactions discussed herein.

In the above related transactions existing debt holders are also sometimes expressing interest in taking over the company – either to liquidate the assets of the business or assume operations.

An investment banker can and will tailor potential buyer lists in advance of any solicitation to maximize long term benefits from any transaction to shareholders, employees, management teams and even the company’s customers.

2010.33 Carl Icahn now owns close to 38% of Lions Gate shares; Mark Cuban did tender his shares

Carl Icahn now owns almost 38% of Lions Gate’s stock. His offer to buy shares from Lions Gate shareholders ended last Wednesday (June 30). Mark Cuban did tender his shares to Icahn. Thursday he purchased 4.64 million more shares on the open market. With other recent purchases he now owns 44.8 million shares, or almost 38%. Due to Canadian law he can’t buy more shares in the open market (Lions Gate is legally a Canadian company). Icahn has declared that he will wage a proxy fight for control.

Later Thursday Lions Gate management adopted a shareholders rights plan triggered at 38% ownership. In it is a provision which allows shareholders excluding a bidder (for the company) to buy shares at a discount. Previously, trying to fend off Icahn, management had raised the “change of control trigger threshold” from in excess of 20% of shares to in excess of 50%. Last April they attempted to put in place a different poison pill but it was voided by the British Columbia Securities Commission. Icahn has already accumulated enough equity to veto mergers and acquisitions, and he has also tripped a provision which grants $16 million in severance to management should they decide to leave the company (they have assured the board that they will stay and fight Icahn).

Management is using classic hostile takeover defense strategies in an effort to slow Icahn down (looking for alternative transactions or ways of building shareholder value). Recent operating results were also strong which helps support their contention that Icahn’s bid is too low. For example, they have discussed a possible merger with MGM and clearly continue listening to counsel with respect to allowable corporate actions. Hostile takeover law is quite sophisticated and management teams must be careful in their attempts to thwart a potential acquirer, or, if the acquirer can’t be thwarted what steps they must take to maximize shareholder value.

The recent operating results? Lions Gate recently reported adjusted earnings for the fiscal year ended March 31, 2010 of $128 million. Film library revenues were up 15% to $323 million, with television revenues rising 60% to $351 million.

Icahn has taken his battle not only to the shareholders but also to the press. Will he start spending more time in the courts as well? Hostile takeover attempts very often involve costly litigation; under Delaware law it is often the only way for a potential acquirer to scuttle anti-takeover provisions. Icahn must act under Canadian law. Indeed, he has already gotten a Receipt of Approval under The Investment Canada Act, in which he made several commitments to government entities regarding how he would run certain Lions Gate businesses should he gain control.

Icahn wants management to clean up the company’s balance sheet, stop producing independent films and just distribute them, stop trying to acquire other film libraries and cut “absurd” overhead costs. Clearly, some shareholders still aren’t siding with him in this battle. The final tally? We’ll find out.

Note for Tuesday, July 5, Lions Gate shares dropped below $7.00 last Friday and remain there today.

2010: 30 Lions Gate and MGM to merge? Or, strategies for avoiding a corporate raider

Why this follow up post took so long:

Updates to my last related blog post on Lions Gate:

1. Carl Icahn now owns 31.8% of Lions Gate’s shares. He has an open offer outstanding to buy shares at $7.00 until June 30. Given that the stock closed today at $7.26 he is unlikely to pick up any more shares that haven’t already been tendered. After June 30 he can buy shares in the open market.

2. Icahn has stated that he will wage a proxy fight after June 30.

3. When Icahn’s ownership position rose above 20% Lions Gate’s loan provisions were triggered (terms under which its banks could have called due related debt). The banks raised the change of control threshold to 50% after talks with management.

4. Lions Gate is now rumored to be in merger talks with MGM. At a 31% ownership stake Icahn can likely scuttle any such plan. Given the public information about both companies it’s hard to believe that a Lions Gate/MGM transaction is possible at this time (Icahn’s ownership percentage; MGM’s debt). But never say never…a well funded partner could bid the price up so high that Icahn would be better off taking a profit and tendering his own Lions Gate shares.

5. While Icahn hasn’t won yet his ownership stake causes real problems for Lions Gate management. What no one but Icahn knows for sure is his ultimate goal. Obviously he wants to make a profit. Does he want to actually own Lions Gate? We’ll find out.

6. As far as avoiding a corporate raider – keep watching Lions Gate. They’re clearly listening to strategic advisors and deciding to fight and not fold. Declaring that the price isn’t high enough is a permissible way of saying no and the stock price jumping above the tender offer price makes the argument very defensible. But the jump also indicates that certain traders are expecting Icahn to bid (or buy in the open market) higher. Selling the company or merging with another is another (effective) strategy.

7. I’ll continue posting updates. Thoughts or comments?

One more photo. Where was I?

2010.28 Toy Story 3 – to infinity and beyond?

Last Sunday, as we drove by a Shrek Forever billboard, my nine year old daughter told me that she wasn’t going to see the movie. She declared that a trick the studios use is to make one good movie then follow it up with a bunch of bad movies under the same name. She then stated that they especially use the trick on children. She doesn’t seem to be alone in her wariness toward the studios’ summer slate as Memorial Day weekend attendance was the lowest since 1993. Box office receipts for the following weekend were down 24% compared with the like period in 2009.

So how is the new calendar market really doing? After all, last year (2009) box office receipts were up. The time period between May and Labor Day typically accounts for about 40% of annual ticket sales. Yet since early May, with the strong “Iron Man 2” release, total domestic box office revenue has fallen about 6.4% to $1.02 billion from $1.09 billion a year ago. This past weekend was up 11% with the strong $56 million (over three days) release of “The Karate Kid” yet a lot of high profile sequels such as “Sex and the City 2” (with some of Warner Brothers worst reviews ever) have disappointed.

What ails the calendar? I’ve researched the expert comments on and offline. An improved economy means that consumers no longer flock to movies as a relatively inexpensive entertainment option. Ticket prices are also up (so tickets aren’t as inexpensive which consumers may not appreciate even if they have the money to spend). Despite the 3D hype only one major 3D movie has been released since May – “Shrek Forever”. But I’m also reading a lot of articles questioning the momentum the current crop of movies has been able to build. And if the audience is already wary of the calendar will the summer prove to be a disappointment?

Last year – during this same summer time window – eight action fantasies and animated films topped $150 million, including four that had already been released by today’s date (“Up”, “Star Trek”, “X-Men Origins- Wolverine” and “Night at the Museum: Battle of the Smithsonian”). Thus far, the current crop of movies isn’t matching that performance.

What’s on the slate for the rest of the summer? At least four 3D movies, including “The Last Airbender” and “Despicable Me”. The much advertised during last night’s Lakers game, “Knight and Day” with Tom Cruise and Cameron Diaz and “Grown Ups” with a slate of five names (though none of the seven actors in those two films has broken the $150 million mark since 2005). “The Twighlight Saga: Eclipse” will be released on June 30. Will Ferrill, Julia Roberts, Angelina Jolie and Sylvester Stallone all have a movie in the cue. And, let’s not discount the possibility of a smaller surprise hit making an impact.

Two links for the summer calendar and related previews are: The movie insider and Teaser-trailer.

I quote my children often on media related topics because they view the various options without a legacy overhang. Hearing my daughter’s comment yesterday – coming from someone who thought the Squeakquel was one of the best movies of all time – and then reading an article in this morning’s NY Times about viewer malaise with the current movie calendar re-kindled some issues I’ve already discussed herein. How can content providers define and target quality experiences to viewers who have so many other options? Can they continue to re-tread the names and story lines that worked in the past? If nothing else, they continue to try.

To be fair, the studios’ core strength is their ability to finance large budgets and give them worldwide visibility and distribution, and to maximize revenue in all forms (including games, licensing and spin-offs). Quality? Well, we can debate that term forever (and I have).

Truly, some franchises continue to work. I’ve already posted an earlier photo from ShoWest in which I’m flanked by Buzz and Woody. We’ll be in a theatre for “Toy Story 3” because Pixar has done a great job in maintaining the franchise’s quality. Like most movie goers I’m perfectly happy to pay for an extraordinary experience.

What movies have you seen this summer that justified the time and expense involved?

Note on the picture – The Toy Story 3 preview can’t be embedded from YouTube as the embed code is blocked. So, I did The Karate Kid instead and highly recommend the clip. It was cheaper – also – than buying a picture from the photo source I use. Example of pricing model issue?

2010.27 Mark Cuban declares that he’ll tender his Lionsgate shares to Carl Icahn; or, the perils of activist investors

For anyone following Carl Icahn’s attempt to acquire control of Lionsgate, Cuban’s announcement increases the pressure on Lionsgate management. Indeed, today management mailed a letter to shareholders touting the company’s achievements and urging investors not to tender their shares to Icahn. The letter points out that throughout the course of 2010 their business results have been on an upswing. They declare Icahn’s $7.00 share offer inadequate.

In April, when Cuban bought his shares, his intent seemed unclear. Cuban has a history with Icahn and as an investor in media-related industries. In 1998 Icahn nominated Cuban for a Yahoo board seat. In 2008, Cuban was on the investor’s proxy slate to seize control of Yahoo’s board. However, Cuban also sold Broadcast.com to Yahoo; and owns movie theater chain Landmark Theatres and film distributor Magnolia Pictures. His long involvement and interest in these industries is well established aside from any relationship he has with Icahn.

Icahn’s offer? Until Wednesday June 16, Lionsgate shareholders can tender their shares to him at $7.00 per share, up from Icahn’s previous offer of $6.00 per share (closing price today was $6.97). For a ten-day period after that he’ll keep the offer open. His current stake is almost 19%; Cuban owns 5.3% rising to just over 7% should 2,000,000 other shares be put to him; about 4% of outstanding shares have already been tendered to Icahn. Once Icahn owns 20%, a default under the terms of Lionsgate’s $340 million revolving credit facility with JPMorgan Chase will be triggered. The bank can provide a waiver; Icahn has offered to provide a bridge loan.

If Icahn’s holdings exceed 33% the top five Lionsgate executives will get a $16 million (change of control) payout. Icahn will also be able to veto any major acquisition. Icahn has said he’ll wage a proxy battle to take over the company’s board.

Separately, MHR Fund Management LLC holds 19.75% of the company’s stock and has joined with other shareholders (who collectively, including MHR, hold 34% of the stock) to support Lionsgate management against Icahn. Interestingly, MHR president and co-founder Mark Rachesky used to work for Icahn. The two claim to still be friendly though they obviously don’t agree with respect to Lionsgate.

Icahn needs the votes of 50% of the shares to win his upcoming proxy battle. That doesn’t mean he needs to own 50% of the company, but he needs to convince other shareholders that he has a better plan to maximize value. He has said he’ll replace management.

What does this all mean? First, activist investors can cause problems; this reality can be potentially worse in the public company context but we’ve also dealt with minority shareholders who can scuttle a transaction involving a private company. Indeed, sometimes just dragging your feet with respect to approving a fundraising or M&A deal is enough to kill it. Second, how your corporate and other documents are drafted matters. Watching the Icahn/Lionsgate saga unfold we can all note how Icahn targets his actions to Lionsgate’s corporate documents and debt terms. He was willing to turn to the courts to invalidate their poison pill. Watch the terms you adopt very carefully and – if you’re public – hire an investment bank and lawyer to evaluate your poison pill or other takeover defense options (before you need to). Three, investment banking can be full of drama and even exciting. But hostile takeovers remain the deal exception and not the rule – though they are much written about. Hostile takeovers are generally limited to those public companies that are large enough to justify the related legal and banking costs. But even for a private company, fights among shareholders can be costly and distracting to management (so plan such issues as succession ahead of time). Fourth, relationships matter. Many of the parties involved in this fight have long histories together. Their related insights help shape actions and responses.

It also means Cuban is no dummy. He bought his shares for prices between $5.95 and $6.27 per share in March and April, so he is making a decent trading profit by tending to Icahn.

Should Icahn win his battle for Lionsgate or should management continue to try and execute their business plan?

I commend Lionsgate management for showing strong financial results despite a very public and distracting takeover battle. I’ll post an update later as events continue to unfold.

To learn more about Hadley Partners go to www.hadleypartners.com. Email me at jones@hadleypartners.com should you have any comments (or comment below).