On2 Shareholders Approve Google Acquisition

On2 announced today, after suspending two previous special meetings in December 2009, that it has enough shareholder votes to complete a merger with Google.

Terms of the deal specify that On2 will operate as a wholly owned subsidiary, and the value of the deal is placed at approximately $133 million in cash and Google Class A common stock.

The road to today's vote—an extension of the vote begun on December 18—was fraught with uncertainty and a public dissension by a group of what the Financial Times' John Dizard dubbed "dissident shareholders."

When the announcement of the intent by On2 and Google to enter into a merger agreement first hit the wires in August 2009, shareholders began immediately questioning the value of the transaction. Google would acquire On2, and each outstanding share of On2 Common Stock would be converted into $0.60 worth of Google Class A Common Stock.

On December 16, 2009, two days prior to the initial special meeting, Google and On2 announced the exact share-to-share exchange ratio.

"The fraction of a share of Google Class A Common Stock to be issued for each share of On2 Common Stock in connection with Google's proposed acquisition of On2, will be $0.0010." a joint press release stated. "The exchange ratio was determined by dividing $0.60 per share by the trading price, which is defined in the merger agreement as the volume weighted average trading price of a share of Google Class A Common Stock based on the sales price of every share of Google Class A Common Stock traded during the 20 trading-day period ending on and including the second trading day prior to the date of the special meeting of On2's stockholders to consider and vote on the proposed merger."

The initial meeting on December 18, however, did not generate enough shareholder votes to reach a majority of outstanding shares in favor of the merger. Affirmative votes by a majority of shareholders, regardless of whether they attended the meeting or voted by proxy, were for the merger to progress.

Adjourning the meeting, apparently, would have meant that the merger vote would be considered a no vote. A company spokesperson did say, after the December 18 meeting was suspended and re-scheduled for continuation on December 23, that the majority of votes cast were in favor of the merger.

On2 encouraged those with large blocs of shares to cast their proxy vote by the next meeting, but the December 23 meeting's primary business was changed into a vote on whether to adjourn until today.

In late December, a number of shareholders began questioning both the fact that no other bidders had come forward to push up the offer price in a bidding war, as well as questioning the falling value of the stock offer from Google.

In part to address the falling value of the stock offering, On2 and Google announced a revision to the terms of the merger in January 2010.

"Since the acquisition was first announced in August 2009," the companies said in a joint press release on January 7, 2010, "the market value of Google's Class A Common Stock has increased significantly while the value of the acquisition has remained fixed for On2's stockholders. By increasing the consideration offered to On2's stockholders by an additional $0.15 per share in cash, On2's stockholders will receive additional value for their On2 common stock that Google and On2 believe better reflects the value that On2's stockholders would have received had the acquisition closed closer to the time of its announcement in August 2009." That additional 15 cents per chare totaled $26 million.

The companies added, however, that they did not expect to increase the offering in the future, noting "this increase in the consideration that Google is offering to On2's stockholders constitutes Google's final offer."

Dizard described, in a January 24 article how On2 activists used public message boards as well as "private, invitation-only sites to exchange information, devise strategy and organise agreed responses."

"It is a more professional environment" than the public message boards, said William Pollock, a dissident shareholder, in the Financial Times article, adding that "people on the public message boards are more likely to misrepresent [the] size of their positions. We made contact with the heads of mergers and acquisitions at firms such as Apple, Cisco, or Adobe that were logical competitors [for Google]. Obviously we would have wanted them to come in and make a counter-offer. We are not in a position to do anything officially other than making sure the [prospective competing bidders] are aware of the opportunity."

Yet, for all the interest in On2 and its technology, it appears that no one else stepped forward to counter-offer for On2, leaving the dissendents—and the arbitrage community which, by some accounts, had picked up between 30-50% of the outstanding shares—to vote today on the merits of Google's revised offering.