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Liquid Audio Mulls Buyout Offer

Music company Liquid Audio (www.liquidaudio.com) said it would consider a buyout offer of $3.00/share (or $68 million) by Steel Partners, the company's largest shareholder. But the buyout is shaping up like a soap opera drama with a surprise suitor, Musicmaker.com, trying to make a grab for Liquid Audio, too.

In early September, Steel Partners II LLP, which owns approximately 7.8 percent of Liquid Audio and is the largest stockholder, sent a letter to the company's board of directors asking them to sell the company to the "highest bidder." The letter said in part: "We are deeply disappointed that the Board has adopted a business strategy doomed to failure and has not implemented a plan to maximize stockholder value."

At the time, Steel Partners used blunt language in describing Liquid Audio's high cash burn rate, low revenues, and questioned the company's ability to attract a large consumer base amid stiff competition.

While it's true that Liquid Audio has been ignored by both MusicNet and PressPlay, it has been successful in getting the attention of the major labels by itself. A promotion to download and purchase a single from Britney Spears’ new album is featured prominently on Liquid Audio's homepage.

"We work with all the major labels. Management has a done a good job [getting major label content], considering the environment we have to deal with," said a representative of Liquid Audio.

This week, in its most recent letter, Steel Partners called on Liquid Audio to set its next shareholder meeting to discuss the offer, rather than wait. It also said that it may increase its offer, but stressed that time was of the essence because Liquid Audio's value "diminishes daily."

A representative from Liquid Audio said that the board of directors does not have a scheduled meeting date and didn't know when the next would one be.

But another suitor has shown up making an offer. On October 8, Musicmaker.com and other parties, said that they acquired a 6.3 percent stake in Liquid Audio, with intentions of getting a 8.6 percent stake. It also said it would consider acquiring all of Liquid Audio's stock. Musicmaker also requested that Liquid Audio increase the number of its board members, and add individuals proposed by musicmaker.com to fill vacancies.

Ten days later, Musicmaker.com requested a special meeting of Liquid Audio stockholders be called on November 27, 2001, to consider the proposals by Musicmaker. But this week Liquid Audio said it denied that request because stockholders are not permitted to call special meetings, according to the company's bylaws.


Poison Pill

Fortunately, Liquid Audio was prepared for these unsolicited offers. In August 2001, Liquid Audio adopted a stockholder rights plan, or what's sometimes called a "poison pill," which protects against unsolicited buyouts. Essentially, the poison pill prevents anyone from buying more than 15 percent of the company's stock without prior board approval.

Not surprisingly, Steel Partners doesn't like the rights plan. A letter from the investment group said that it believes the poison pill "serves to insulate management from the threat of a change in control of the Company."

Interestingly, the entire conversation between the stockholders and the company is being conducted through press releases. It seems discussions between Steel Partners and Liquid Audio have deteriorated to the point where they are not communicating directly. For now, it appears that Steel Partners will have to wait until Liquid Audio's next board meeting, whenever that is, to find out what the decision will be.

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