A group of shareholders who between them own about 19 percent of Occam Networks filed suit Oct. 6 against Occam’s board of directors to stop the proposed acquisition of the company by Calix.

In a news release announcing the suit, the investors — who include legendary hedge fund manager Michael Steinhardt — claim the $171 million in cash and stock that Occam’s board accepted from Calix “dramatically under-values” the company. It echoes a scathing letter to the board from the same investors, dated Sept. 27, which said, “Occam’s board cut what can only be called a lousy deal.”

Goleta-based Occam and Petaluma-based Calix are the top two players in a niche market of supplying Internet networking equipment to small and mid-sized telecommunications and cable companies. Analysts expect massive growth in the sector, fueled by federal broadband stimulus funding.

The suit by Steinhardt and his co-plaintiffs was filed in Delaware, and it follows three lawsuits filed in Santa Barbara County Superior Court. The basic claim is the same in each one: The roughly $7.75 a share in cash and stock that Occam’s stockholders are being offered low-balls the company’s worth, given the boost in business on the horizon, and Occam’s board made it nearly impossible for the company to shop for a better deal.

Occam and Calix both said they could not comment on the lawsuits and letters from Occam shareholders.

Expected to close next year, the deal would give Occam investors about $3.83 in cash for each share they own, plus about one-third share of Calix’s common stock. After the deal, Occam investors would own between 14.1 percent and 15.9 percent of Calix’s common stock.
The transaction needs shareholder approval. The 27 percent of Occam’s shares controlled by its executives and board of directors have voted in favor of the deal.

Steinhardt — who, according to Forbes magazine, built a personal fortune of half a billion dollars during a three-decade run with Steinhardt Partners — criticized the Calix deal for not paying Occam shareholders a healthy premium for cashing out of a company poised to expand revenues sharply. One analyst put a $10.50 price target on Occam’s stock, and Occam’s own managers were predicting double-digit quarter-over-quarter growth even as the company faces part shortages that hold it back from selling as much equipment as it could.

“If you ask us, business sounds like it’s good and getting better,” Steinhardt and the other investors wrote in their Sept. 27 letter.

The proposed Calix deal, they wrote, “comes nowhere close to recognizing either the intrinsic value of the company’s cash flows or, as in the present case, its potential strategic value to a third party.”

“We believe that the board of directors of Occam has acted, once again, with reckless and wanton disregard for its shareholders, and we hereby demand that the board move immediately to open up the sales process by auctioning the company to the highest bidder,” the letter says.

In their lawsuit, Steinhardt and the other investors claim that Occam failed to shop the company around or to conduct what’s known as a “market check.” That’s the process of finding out what a reasonable price might be.

The legal process can be “fraught with peril for a board that doesn’t do a market check,” said Mike Pfau, a partner in Santa Barbara firm Reicker, Pfau, Pyle & McRoy. He is not involved in any of the Occam suits.

If any of the cases end up in court, a judge or jury probably wouldn’t consider speculation about Occam’s future revenue gains, Pfau said.

“It’s really kind of a present-value analysis,” he said. “The legal issue is, did they run a defective process that did not get the highest possible price reasonably available to shareholders?”

• Read more about this story in the Oct. 8 print edition of the Business Times.

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