Google Must Fight Lawsuits to Win On2's Hand in Marriage

On2 Technologies' shareholders have filed suit in Delaware and New York to block Google's $106.5 million purchase of video compression maker On2. The plaintiffs claim On2 did not shop On2 to other companies to get the best price. On2 CEO Matt Frost promises to fight the suits. Google remains silent on the brouhaha.

Shareholders for On2 Technologies have filed suit to block Google's $106.5 million bid to buy the video compression software maker because they are unhappy with the purchase price and certain agreements On2 executives made with Google during negotiations.

Google agreed to buy On2 Aug. 5 to shore up its video technology offerings. On2's Video software compresses video in more than 2 billion desktop computers and mobile devices worldwide for such companies as Adobe, Skype, Nokia, Sun Microsystems, Sony and Brightcove. The deal is expected to close in the fourth quarter this year.

The New York Post, which broke the news Aug. 12, said investors filed separate lawsuits in New York and Delaware courts against Google and On2 claiming Google's offer undervalues On2. The Delaware suit alleges On2's board agreed to "no shop" and "standstill" provisions that prohibit On2 from looking for other buyers or considering higher offers, the Post said.

Amid these accusations, On2 shareholders are seeking class-action status and a permanent injunction against the deal, as well as punitive damages.

Google declined eWEEK's request for comment. On2 CEO Matt Frost addressed and vowed to fight the legal actions in an 8-K filing with the Securities and Exchange Commission Aug. 12. Frost wrote:

"Both complaints generally allege, among other things, that the members of the Company's board of directors breached their fiduciary duties to the stockholders of the Company in connection with negotiating and entering into the previously disclosed merger agreement with Google Inc. ("Google"), and that Google and the Company aided and abetted in such alleged breaches of the directors' duties. Both complaints seek, among other things, declaratory and injunctive relief and the Delaware complaint also seeks damages in an unspecified amount. The Company believes that these claims are without merit and intends to vigorously contest such allegations."

On the surface, the terms of the deal appear generous. Google offered to convert each outstanding share of On2 common stock into 60 cents' worth of Google class A common stock, a 57 percent premium over the 38 cent closing price of On2's stock on Aug. 4.

However, shareholders and other experts believe On2's paltry stock price, and by extension Google's offer, don't reflect the value of the company's technology.

On2 makes a series of video compression codecs and other video technologies used by hundreds of businesses. On2's latest compression codec, VP8, is noticeably better than rival compression technology H.264 in this side-by-side comparison on On2's Website.

Google's bid last Wednesday was followed a day later by a contentious On2 earnings call, where On2 investors chastised management for agreeing to sell the company and threatened to file suit.

More foreshadowing of legal action followed Friday. Responding to an eWEEK story about what Google would do with On2's technology, K2J wrote Aug. 8:

"VP8 is better than h.264 yet Google will pay only $106 million????... I am in contact with many ONT shareholders who are very unhappy with this deal. There are already lawsuits being filed against the ONT board for trying to give away the company. Shareholders must vote on the deal to approve and it is unlikely they will approve it at the current price."

The investors filed suit in Delaware Chancery Court and in a New York Supreme Court Monday.

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