The honeymoon between executives at Microsemi Corp. and Microchip Technologies Inc. is officially over, four months after a $10.2 billion megadeal that began the two chipmaker’s marriage.
In its wake, Orange County’s largest company sale in two years has been marked by contempt, executive trash talking and now a defamation lawsuit.
Former Microsemi Chief Executive James Peterson and three of his former executives, who were headquartered in Aliso Viejo and summarily dismissed from their positions shortly after Microchip (Nasdaq: MCHP) bought their business, are suing the Chandler, Ariz.-based chipmaker and its executives for alleged slander, libel and unfair business practices.
The lawsuit, filed in Santa Ana’s Superior Court and reported first by the Business Journal last week, names Microchip Chief Executive Steve Sanghi and three of his top executives as defendants.
“Sanghi has routinely used Microchip’s acquisitions, not just to grow Microchip, but also to dupe shareholders and employees alike into believing that the acquired companies were burdened with systemic problems at the time of acquisition that their former management was either too inept to understand or had supposedly concealed,” the lawsuit said.
The plaintiffs are represented by Todd C. Theodora from Costa Mesa-based Theodora Oringher PC, who was the attorney for Monica Lewinsky in the Bill Clinton controversy and lead trial counsel for the Los Angeles Angels of Anaheim when it successfully defended itself against a $300 million lawsuit brought by the city over changing the team’s name.
The plaintiffs haven’t disclosed how much money they’re seeking in the lawsuits.
“They’re going to have a hard time getting anything out of this,” said longtime industry observer and technology analyst Roger Kay.
Peterson, who recently started an OC-based private equity firm Peterson Capital Group, got a nearly $22 million payment as a result of the company’s sale, according to regulatory filings.
Slander and Libel
The plaintiffs also include former Microsemi Chief Operating Officer Paul Pickle, Executive Vice President of Marketing and Sales Rick Goerner and Vice President of Global Distribution Sales Phil Sansone.
They’re seeking judgement for slander, trade and personal libel, and unfair business practices, as well as injunctions against “making, uttering, or publishing any further defamatory statements or misrepresentations about plaintiffs or other former Microsemi executives” and injunctions against those “engaging in the unlawful, unfair, and fraudulent business practice.”
The lawsuit further seeks unspecified compensatory and punitive damages that would determined at trial, attorney fees and associated costs, and other relief the court deems warranted.
Microchip said it plans to challenge the claims.
“We will vigorously defend ourselves against such lawsuit,” a spokesperson told the Business Journal.
Who’s to Blame?
The acquisition was announced on March 1 as a way for Microchip, which focuses on chips for the industrial, auto and home appliance markets, to expand into Microsemi’s market of chips for communications and aerospace and defense applications.
Microsemi reported record sales of $1.8 billion in its last fiscal year and record net income of $176 million.
Microchip reported revenue of $3.9 billion in its last fiscal year and net income of $255 million.
The sale was OC’s largest since February 2016, when Avago Technologies Inc. acquired Irvine-based chipmaker Broadcom Corp. for $35.7 billion, the largest deal in tech history at the time.
Microsemi was Orange County’s fourth-largest public company by market value at the time the sale was announced, according to Business Journal data.
The former Microsemi executives and most of the management team were axed by Sanghi on May 30, the day after the transaction closed.
Microchip shares are down about 30% since the sale closed. Shares were trading at about $66 late last week, giving the company a market cap of $16 billion.
The suit alleges that Sanghi blamed Microsemi executives for Microchip’s underperformance after the sale, and that he fabricated claims that Microsemi was performing poorly leading up to and after the sale.
“After the closing, defendants began a concerted and intentional effort to defame,” the lawsuit reads.
The lawsuit said Microchip executives made repeated claims to analysts and the press that Microsemi “over-shipped” inventory and had “excess” inventory in the channel, and that the chipmaker engaged in a “fake revenue process” to pump up revenue, comments that were reported by media, including Investor’s Business Daily and the Wall Street Journal, as well as investor notes by Piper Jaffray, Raymond James and JPMorgan Chase.
“There simply was no ‘overshipping’ or ‘excess’ inventory, and to say otherwise is false and misleading,” the lawsuit said.
Acquisition Controversy
Peterson, who became Microsemi chief executive in 2000 and board chairman in 2013, oversaw 27 acquisitions and three divestitures during his tenure.
On an Aug. 9 conference call with analysts to discuss quarterly results, Sanghi criticized those acquisitions as being incomplete, saying aligning operations had been enormously complex as “little to no integration of prior Microsemi acquisitions had taken place.”
The lawsuit further alleges that Sanghi aimed to falsely blame Microsemi as a reason to justify the denial of Microsemi employees’ earned compensation, and to artificially depress Microchip’s stock price so he and the other defendants could secure more lucrative compensation packages for themselves.
In an Aug. 9 press release on June quarter earnings, the company said it was “adversely impacted by $226.9 million of Microsemi purchase accounting, restructuring and other charges.”
The claim led Microchip to forgo earnings guidance, a rare move.
Sanghi told analysts that the first two months of integration uncovered “weaknesses” at Microsemi after accessing information that “we were not able to get before.”
The lawsuit claims that Microsemi executives met Microchip executives on numerous occasions for months leading up to the transaction to discuss various business operations and processes.
Microsemi also provided access to a virtual “data room” with more than 15-gigabytes of information, or more than 4,650 files.
Moreover, Microsemi and its attorneys were alerted when the files were opened, according to court filings.
“Microchip and its attorneys wholly neglected to access a large portion of the information and documents in the Data Room prior to the closing,” the 56-page court document said.
Truth Sought
Sanghi’s salvos ultimately led to the lawsuit, according to the plaintiffs.
“When we read and heard them, we needed to make sure the truth is out there,” Pickle told the Business Journal last week.
Before filing the lawsuit, Peterson and Pickle sent a letter to Sanghi and Microchip management to “correct the record,” and urge them to retract some statements, according to Pickle.
“There was no response from the management team,” he said.
The criticisms levied against Microsemi management and operations appear to conflict with prior statements Sanghi made in press releases lauding the deal and union of “two of the strongest business franchises” in the industry.
Legal Powerhouse
Theodora Oringher calls itself “a legal powerhouse known for being the go-to firm for sophisticated, high stakes litigation.”
Chairman and Chief Executive Theodora, who’s tried more than 75 cases to verdict, has plenty of Orange County connections. He was chairman of the board of directors of the Tiger Woods Learning Center and was a founding board member of Shady Canyon Golf Club.
Other attorneys listed in the filing include Jeffrey H. Reeves, who was also a lead counsel for St. Joseph Health System in a data privacy breach, and Michael E. Bareket, an associate who works in commercial litigation.
