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Shareholders demand court bans S3/Diamond merger

Deal undervalues Diamond stock claims suit

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A gang of shareholders in Diamond Multimedia have sued the company in an attempt to block its takeover by 3D graphics specialist S3. The shareholders claim S3's $200 million acquistion through a share swap undervalues Diamond's stock. S3 is offering one of its own shares for 1.9 Diamond shares, but the shareholders described that as a "bargain basement" price. The suit, filed with the Santa Clara County, California Superior Court states: "The intrinsic value of the equity of [Diamond] is materially greater than the consideration proposed." That, they claim, means Diamond's directors have failed their statutory obligation to maximise the value of the shareholders' stock. Do the shareholders have a point? Arguably not. S3's acquisition proposal was made before Diamond released its most recent financial results, for its second quarter, ended 30 June (the acquisition proposal was made on 22 June). The figures showed the company's revenues had fallen 34 per cent year on year despite an improvement in Diamond's loss. Diamond is betting on the success of its RioPort digital music division, which produces the Rio MP3 music player. However, RioPort is being prepared to be spun off, probably through an IPO (assuming recent Net stock price falls haven't dampened investors' spirits too much), so the rest of Diamond doesn't look too promising as an ongoing business. The company was hit hard by the increasing commoditisation of 3D graphics cards and modems, and price wars in both markets. While it is looking toward some potentially more profitable areas, such as home networking and Net access devices, it may be some time before both business get Diamond back to where it once was. That's less of an issue for S3 which primarily wants Diamond as a board manufacturer, part of its plan to compete more fully with ATI and 3dfx, both of which design graphics chips and build boards based upon them. ®

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