Debt-ridden, loss-making Encore Computer Corp has yet another problem on its hands – a rebellion by shareholders. A deal to sell its storage products business to Sun Microsystems Inc for $185m, which was due to be completed in September, must now wait for approval by a shareholders’ meeting on November 24. Irate shareholders believe that Sun drove too hard a bargain in its negotiations – although if this was the case, it is surprising that no other company has attempted to top its offer. And they are angry that, of the $185m, $150m will be used to replay debts to its largest shareholder Gould Electronics Inc of Ohio, a subsidiary of Japan Energy Corporation. According to its SEC filing on the merger, from 1989 to June this year, Encore borrowed a total of $399m from Japan Energy ( though they got in return a free license, of undisclosed value to all of Encore’s intellectual property). But accountants now estimate that the break-up value of Encore is now just $22.4m. So Japan Energy will emerge with a substantial loss on the investment – but far better off than if it refused to accept a significant write-down on the investment and allowed the company to go to the wall. Officially Encore is optimistic about the shareholders’ vote. We are aware that not all shareholders are satisfied with the terms of the sale; however, Encore and Gould are taking the necessary actions to ensure a favorable outcome of the vote. We are confident the shareholders will approve the sale, said a spokesman. No-one doubts the board can command a majority of the votes, but since the deal needs approval from 75% of shareholders some observers believe the rebels stand a chance. One factor which has incensed the rebels are retention agreements designed to ensure that 49 key executives stick with the company through its current troubles. Their loyalty will be rewarded by payments of between 50% and 100% of their current salaries and president and CEO Kenneth Fisher will pick up an extra $566.525 under the deal. By coincidence, Encore Computers has reported third quarter figures showing that losses are slightly down in the three months to September 28, from $19m to $16.3m after a collapse in revenue from $13.2m to $7.4m. Faced with these sort of figures, shareholders need some sort of incentive to stick with the company.
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