NaviSite, Inc. Shareholder Files Lawsuit In Effort To Block Proposed Takeover

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Company Name(s): 
Case Name: 
NaviSite Deal Case 02/09/2011
Case Status: 
Lawsuit Filed
Affected Securities
Lawsuit Overview
Type of Lawsuit: 
Mergers and Acquisition
Date Filed: 
Class Period End: 

An investor in shares of NaviSite, Inc. (NASDAQ:NAVI) filed a lawsuit in State Court against Time Warner Cable and certain of NaviSite’s officers and directors in effort to block the proposed takeover of NaviSite by Time Warner Cable’s Avatar Merger Sub Inc. The plaintiff alleges certain directors and officers at NaviSite breached their fiduciary duties.

According to the class action complaint the plaintiff alleges that the defendants agreed to sell NaviSite to Time Warner Calbe at an unfair price via an unfair process.

On Tuesday, February 1, 2011, after the market closed NaviSite, Inc. (NASDAQ: NAVI) and Time Warner Cable Inc. (NYSE: TWC) had announced that they have entered into an agreement under which Time Warner Cable will acquire NaviSite for $5.50 per NAVI share in cash, or a total equity value of approximately $230 million.
NaviSite said the offer represents a 33% premium to NaviSite’s Tuesday's closing price. Indeed, shares of NaviSite (NASDAQ: NAVI) traded before the announcement at roughly $4.20 per share and increased in response to the takeover news to $5.48 per share.

But the plaintiff claims the premium is too low compared to other recent deals in the cloud computing industry. In addition the premium does not take into consideration that sales in the cloud computing industry are anticipated to nearly double between 2010 and 2011 and increase by 800% between 2008 and 2013, so the plaintiff.
The plaintiff also alleges that in reality the premium is not 33% but only 8% when taken into consideration that Time Warner Calbe will also acquire $40million of NaviSite’s valuable net operating losses, which will give Time Warner Cable tax savings of $40million, and therefore need to be reduced from the proposed offer.
Furthermore NaviSite has performed well for its shareholders in the past. NaviSite reported over the last four filings periods consistent 12months Total Revenue ranging between $123.21 and $132.13million with lately a Net Income of $13.47million. Additionally NaviSite reported stronger than expected earnings for the first quarter of 2011.
The plaintiff also alleges that the sale process is unfair. The board of directors of Navisite breached its fiduciary duties by agreeing to preclusive, deal protection devices, such as a no-solicitation provision prohibiting NaviSite from properly shopping the company, a $7.5million termination and $1.5 expense reimbursement, and a matching rights provision.