Harry Campbell

The bidding for Clearwire shows that takeovers are sometimes just a poker game, albeit with billions in the pot. Depending upon how well the directors play and when they decide to fold or up the ante, shareholders can be up or down billions of dollars.

This game began with Sprint Nextel holding most of the cards. Sprint controls over 50 percent of Clearwire and in December, Sprint and Clearwire announced an agreement for Sprint to acquire the remainder for $2.97 a share. Sprint agreed to pay a 128 percent premium, but shareholders still protested that Sprint was underpaying. This is a common complaint in so-called going-private transactions, where the controlling shareholder can use its power to push through a cheap buyout.

But there is now a well-worn set of procedures aimed at preventing this, procedures that Clearwire’s board followed. A special committee of independent directors was set up to run the negotiations. Clearwire also conditioned the deal so that its shareholders other than the Sprint group had to approve it.

Still, Clearwire’s board was being criticized for making a mistake in its first step in the game — deciding to play and selling to its controlling shareholder. Once the dynamics of a sale to management or a big shareholder take hold, it is hard for shareholders to stop it no matter what the procedures. Witness the controversy surrounding the proposed buyout of Dell, where shareholders are being left with a choice of either selling or upsetting Dell’s founder and chief executive, Michael S. Dell.

Clearwire’s board, though, was faced with an even harder decision, since Sprint was offering $800 million in financing needed to keep Clearwire out of bankruptcy. So the board may have felt its options were limited. And an announced deal could arguably cause other bidders to emerge.

This is the thing about takeovers, there are always other players eyeing the bidding.

Sure enough, the dynamics of the game shifted in January, when Dish Network made a proposal to acquire the company for $3.30 a share.

This threw things into flux as Clearwire’s special committee sat on Dish’s bid. A growing number of Clearwire shareholders were hedge funds who were buying Clearwire shares. Combined, they held positions large enough to vote down the Sprint deal, and they began a campaign to push the price up. The hedge funds might have been bluffing, but the threat was real.

While Clearwire’s board had succeeded in creating a force to push back on Sprint, it eventually turned to actively opposing Dish’s bid. In a May letter to shareholders, Clearwire defended Sprint’s offer price. The directors asserted that the committee had “thoroughly evaluated” Clearwire’s prospects and that Sprint’s offer of $2.97 a share was fair. Clearwire also took a page from the Dell playbook to say that its stand-alone prospects were “highly uncertain.”



In hindsight, Clearwire’s board probably thought that it was pursuing the only deal on the table, one it had contractually agreed to support. But the Clearwire board was also doing something boards do too often in the sales process: lock into a transaction as the one and only possibility.

Still, the hedge funds stayed in the game.

In May, Sprint blinked and raised its offer to $3.40, topping Dish’s proposal. The Clearwire board promptly accepted the proposal. Sprint was being canny here, paying no more than it had to to try to sway the hedge funds and call their bluff.

But Sprint was also coming under its own pressure, as Dish had also bid for Sprint itself — trying to trump a competing deal in which SoftBank of Japan would pay $21.6 billion for control of the wireless operator. (Sprint shareholders approved the deal with SoftBank on Tuesday.)

It was at this point that you had to scratch your head, wondering what Dish was thinking. Sprint clearly needed Clearwire, but Dish may have just been looking to stir the pot toward a goal only it knew.

And did I mention that Dish’s chairman, Charlie Ergen, is a former professional gambler? He appeared to be doing something that a good poker player does, creating uncertainty to try to control the situation.

Dish was also actively buying Clearwire’s debt, leading some to speculate that he was making a bid to buy the company in bankruptcy.

Clearwire’s shareholders continued to protest, and more players entered the game. The proxy advisory service Glass, Lewis & Company came out against the transaction while its rival, Institutional Shareholder Services, supported it. I.S.S. did so because it felt Clearwire’s options were limited and the price was within an appropriate range, but Glass Lewis disagreed. The service stated the offer was inadequate and alternatives hadn’t been fully explored.

It was now time for a final round of bidding. Dish made the next move and raised its offer to $4.40 a share in May. With that move, the Clearwire board now fully engaged with the sale process, accepting Dish’s offer and recommending against the Sprint deal.

Dish also later raised the ante again by stating that it was no longer interested in buying all of Sprint. While it might have been for business reasons, it also might have been a strategic move to affect the bidding for Clearwire.

Then last week, Sprint not only raised its bid to $5 a share, well above the price that Clearwire’s board was originally urging its shareholders to accept, but also locked up almost a majority of the outstanding shares. Seven funds holding 45 percent of the shares needed to approve the deal have now agreed to vote for the deal or otherwise sell to Sprint. This basically blocks out Dish and makes its pursuit of Clearwire hopeless.

There are lessons here.

When dealing with majority shareholders or even management, the game is initially to their advantage. Shareholders may not be getting a bad price, but it may not be the one they would have gotten without a majority shareholder. Perhaps the best remedy here is for boards to recognize this. If there is only one bidder and little leverage, they could simply choose not to sell, and find other options.

The Clearwire transaction also shows that not all shareholders are alike. Mutual funds tend to sell quickly and are more willing to leave money on the table. They are not in the business of taking on significant risk. But here, the hedge funds came into this deal full force, acquiring a blocking position that had real leverage. For all those who criticize hedge funds as short-term money, they also were willing to take risk to the benefit of all shareholders.

They did something important, putting pressure on the bidders to raise the price.

Finally, Clearwire’s clearest lesson is that the price an investment bank and a board are willing to call fair is quite different from what someone is willing to pay. Takeovers are really about how well you can play the bidders and the parties against each other and create leverage out of nothing.

And this is all done when the real intentions of many parties are unknown. Because of this, just because a board says that a bid is not viable or there is only one bidder doesn’t mean it is the case. Sprint, and its backer SoftBank, are paying $4 billion more than Sprint originally bid, leaving one wondering if this wasn’t Dish’s goal in the first place.

So what happens next? The first round of the game is over, but the telecommunications deal-making will shift. Dish may now decide it was just happy to force Sprint to pay up. Remember T-Mobile, even after its merger with Metro PCS, remains the No. 4 wireless carrier and an oft-named target.

The game continues, and boards that don’t play it well are doomed to lose out, leaving their shareholders much poorer.