June 4, 1997 12:20 AM PDT

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When Microsoft (MSFT) announced its plans earlier this year to acquire WebTV Networks in a $425 million deal, the maker of TV set-top boxes was facing the prospect of a cash crunch by March 1998, according to a Securities and Exchange Commission document filed yesterday.

But WebTV officials, reached today, said they are not strapped for cash and have access to plenty of financing. The same was true at the time Microsoft came calling and WebTV turned down the software giant's initial offer of $375 million, they said.

"We went into this [Microsoft] deal in a position of strength," said Albert Pimentel, WebTV's chief financial officer, today.

The filing stated that WebTV's cash shortage may force it to seek additional funding if the proposed acquisition by Microsoft is blocked by government regulatory agencies.

"WNI's [the filing's abbreviation for WebTV] cash assets and currently available credit line are not sufficient to meet its current operating plan requirements through March 1998," the filing states. "In the event the [Microsoft acquisition] is not consummated, WNI would seek additional debt or equity financing to meet its financial requirements."

The company expects it will need at least an additional $75 million to fund its current operating plan through March 1998. WebTV Networks has roughly $20.7 million in cash and other liquid equivalents at the end of its fiscal year, according to the filing.

But Pimentel said the company had secured more than $100 million in financing from investor companies in late January. It was in the process of receiving those funds in phases when Microsoft tendered its offer.

As part of the deal, Microsoft agreed to extend a $30 million line of credit so WebTV could suspend its earlier financing arrangement with the investor companies.

"Our attorneys did not allow us to include this in the [SEC] filing because the money had not yet been fully funded and would have been considered speculative," Pimentel said. "The only certainty is when all the money is in the bank."

The financing from the investor companies would have funded WebTV's operations for 15 months, he said. The company had received the first phase of $14 million prior to the Microsoft agreement.

WebTV had reported a net loss of $42.7 million for its 1997 fiscal year ended March 31, on revenues of $42.4 million, according to the filing.

The company expects to close the Microsoft deal by summer or fall, provided the Justice Department does not nix the acquisition over antitrust issues. The DOJ last month requested more information on the acquisition as part of its standard procedure under the Hart-Scott-Rodino Act, which requires the department to review proposed mergers and acquisitions that involve companies with assets or sales of more than $10 million.

If the DOJ blocks the acquisition, the company would consider filing for an initial public offering, WebTV chief executive and president Stephen Perlman told CNET's NEWS.COM in an earlier interview.

Investment bank Deutsche Morgan Grenfell, which was involved in the Microsoft and WebTV deal, outlined an estimated valuation for WebTV should it launch an IPO.

DMG's range of present values was $4 to $7 a share but extended to as high as $10 to $13 a share based on a range of future earnings multiples of 20 to 40 times, according to DMG's analysis.

The following is a timeline, based on the SEC filing, of how the Microsoft-WebTV deal came about:

September 13, 1996: Microsoft purchased 702,939 series C shares of WebTV Networks. In connection with such a purchase, Microsoft and WebTV enter into an agreement relating to possible technology sharing and licensing arrangements between the companies.

Mid-September 1996 to late January 1997: Microsoft and WebTV personnel conducted discussions relating to technology sharing and licensing arrangements.

February 3: Craig Mundie, Microsoft's senior vice president of the consumer platforms division, Gregory B. Maffei, Microsoft's vice president of corporate development, and other Microsoft personnel met with Stephen G. Perlman, WebTV's president and chief executive officer, and other WebTV staff at Microsoft's Redmond, Washington, headquarters to discuss technology sharing and licensing arrangements.

February 17: Mundie, Maffei, Perlman, and their respective staff members met at WebTV's Palo Alto, California, headquarters to continue the discussions. Prior to the commencement of such discussions, Mundie discussed with Perlman the possibility of a business combination between the two companies. During the following week, Mundie, Perlman, and other Microsoft and WebTV staff expand these talks.

February 20: Microsoft engaged Deutsche Morgan Grenfell to act as its financial advisor in connection with the proposed transaction.

February 21: The WebTV directors, together with representatives of DMG and Venture Law Group, met to consider the proposed business combination with Microsoft.

February 23: Microsoft chairman Bill Gates, Mundie, and Maffei met with Perlman and WebTV's executive officers in WebTV offices to discuss, among other things, WebTV's history, business model, technology, and products.

February 25: Microsoft and WebTV entered into a nondisclosure agreement that superseded an earlier agreement between the companies.

February 28: Maffei communicated Microsoft's interest in acquiring WebTV to Albert Pimentel, WebTV's chief financial officer, representatives of DMG, and representatives of Venture Law Group.

First week of March: Representatives of Microsoft, Preston Gates & Ellis, WebTV, DMG, and Venture Law Group continued negotiations regarding a business combination between the two companies. During that period, due diligence meetings relating to WebTV's technology, products, and business were also held.

March 4: Technical teams from both companies met in Palo Alto, California, and, later that week, representatives of Microsoft Network met with WebTV's executive officers at WebTV headquarters.

March 7: Robert Herbold, Microsoft's chief operating officer, and Paul Maritz, Microsoft's group vice president of platforms, held discussions with William Herman, WebTV's vice president of marketing, and other personnel.

March 13: Microsoft's board of directors met to consider the proposed business combination; authorized Microsoft management continue discussions and consummate a combination within certain parameters.

March 14: Maffei communicated a Microsoft offer having an approximate value of $375 million in cash and stock to acquire WebTV to representatives of WebTV, DMG, and Venture Law Group.

March 17: Following a meeting of its directors, WebTV declined Microsoft's offer.

Week of March 24: Representatives of Microsoft, Preston Gates & Ellis, WebTV, DMG, and Venture Law Group continued negotiations regarding a business combination between the companies.

March 30: Gates and Perlman discussed WebTV's technology, products, and business as well as terms of the proposed business combination.

March 31: The WebTV board met again to consider the proposed transaction. After this meeting, representatives of WebTV, DMG, and Venture Law Group discussed various terms of Microsoft's offer with Maffei. Later that day, a tentative agreement was reached with respect to the principal terms of the transaction, subject to agreement on definitive documentation.

March 31 to April 5: Representatives of Microsoft, Preston Gates & Ellis, WebTV, DMG, and Venture Law Group negotiated the final terms of the transaction, an approximate value of $425 million in cash and stock.

April 5: During the meeting, after presentations from DMG and Venture Law Group, the directors of WebTV approved the proposed acquisition. The parties executed the recapitalization agreement the next morning.

April 6: The parties announced the transaction at the National Association of Broadcasters meeting in Las Vegas, Nevada, and issued a joint press release.

 

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