The New Napster in Financial Trouble - Gearing for a Hostile Take-over

Three investors are launching a fight to be elected to the board of Napster Inc. so they can push for a sale of the West Hollywood digital music company.

Their campaign platform: Current management is incompetent and busy enriching itself. The firm, which has been on the block before, should try harder to find a buyer.


"Napster should be exploring all possible avenues of maximizing stockholder value," including a sale, the investors said Thursday in a letter filed with the Securities and Exchange Commission. "The actions taken by the current board have made that option extremely difficult for potential acquirers."

A Napster spokesman declined to comment.

Investors Perry Rod, Thomas Sailors and Kavan Singh together own about 1.5% of the 47.9 million company shares outstanding. They seek three of the nine board seats that will be voted on at Napster's annual meeting Sept. 18.


Napster was once the name of the famous free music-sharing service, which was shut down in 2001 as a result of a copyright lawsuit filed by the recording industry. After Napster filed for bankruptcy protection in 2002, its name and logo were bought by Roxio Inc. The company became Napster in 2004.

Napster created a music subscription service and began a mobile music service with several partners, including AT&T Inc. In May, it opened a music download store.

But the company has struggled. This month it reported a quarterly loss and said revenue dropped 6% to $30.3 million. Its subscriber base also shrank to 703,000 from 760,000. Napster started offering discounts to try to attract more subscribers this summer.

It has long been viewed as a takeover target. Napster has $70 million in cash reserves, roughly the same amount as its market valuation. Since 2004, the share price has fallen more than 80% from $10.26. It fell 5 cents Thursday to $1.45.

The investors, represented by Okapi Partners, say the company's "generous senior executive compensation practices overall have created incentives for management not to sell the company." A change of ownership would trigger a provision granting $1.8 million and other benefits to Napster's chairman and chief executive, Chris Gorog.

Piper Jaffray analyst Mike Olson said about the investors that he could "understand their frustration given what the stock has done."

Napster, with its subscribers, could be an attractive acquisition for other music services, he said.