Within hours of the announcement that Hughes Communication Inc. would be acquired by EchoStar Corp. in a $2 billion deal, no fewer than seven law firms announced they would be opening an investigation into the agreement, with a possible class-action lawsuit to follow.
Germantown-based Hughes would be acquired for $60.70 per share in cash, and assume $700 million in debt under the deal, which was announced Monday morning. EchoStar makes television set-top boxes and provides satellite services. The deal is expected to close in six to nine months and needs federal approval.
Hughes, a supplier of broadband satellite services, would become a wholly owned subsidiary of Colorado-based EchoStar if the deal is approved by shareholders. The companies did not say if the move would affect jobs or if Hughes’ headquarters would be relocated.
“Nothing has been discussed at this point,” Hughes spokeswoman Judy Blake said. “Everything is staying status quo right now, and we’re going to keep doing our regular day-to-day business.”
The boards of directors of both companies have approved the deal. And Apollo Management IV L.P., which owns a majority of Hughes’ outstanding stock, has also approved the transaction.
The merger evoked a quick response from law firms specializing in shareholder lawsuits that announced investigations into whether the companies had breached their fiduciary responsibilities by agreeing to the deal. Before the stock markets closed on Monday, seven such firms, including Stevenson-based Brower Piven, had made public statements saying they were seeking clients for a possible class action lawsuit.
The law firms all allege the deal low-balls the value of Hughes. Browers Piven and Atlanta-based The Briscoe Law Firm PLLC, for example, said the $60.70 offer was too low considering the stock had traded above $64 per share already this year.
“These are pretty typical complaints you see with these kinds of deals,” said Luke Green, head of research at Securities Class Action Services Inc. a subsidiary of Rockville-based Institutional Shareholder Services Inc.
Shares of Hughes lost $2.31, or 3.7 percent, Monday to close at $59.47. EchoStar’s shares gained 96 cents, or 3.2 percent, to close at $30.84.
In announcing the deal, Hughes and EchoStar said that the offer is a 31 percent premium when compared to Hughes’ Jan. 19 closing price of $46.43. Shares of Hughes have traded in the $21.19 to $64 range over the last year.
The challenge to the Hughes deal is part of an increase in the number of shareholder class action lawsuits filed in recent years. Part of the increase has been driven by the rebound in mergers and acquisitions activity that had been moribund during the worst of the recession, but have rebounded the past year.
“It’s typical in a recession for merger and acquisition activity to go down,” Green said. “And, in a recovering economy, the opposite is true — you have businesses that have suffered and are looking maybe to divest. There’s a lot of incentive for deals to happen.”
Unlike other years when merger activity picked up though, the past few years have seen legal challenges to deals rise exponentially. The lawsuits seek to tie up, or stop, mergers not in the best interest of shareholders.
Green said that in 2008 there were 36 shareholder lawsuits filed in federal and state courts. In 2009 that number jumped to 191. In 2010 there were 327 class action shareholder lawsuits filed.
“There are some firms looking for other sources of revenue and these have been called easy-money cases since the companies are highly likely to settle to get the deal done,” Green said. “And, since the firms’ typical arrangement includes hourly fees and a contingency on what is paid — it can be highly lucrative.”