E Ink sale price questioned

The surprise June 2 announcement that E Ink Corp. had agreed to be purchased by Prime View International of Taiwan, one of the year's highest profile technology deals, was seen by many as another example of an innovative Massachusetts technology company being eagerly snapped up by an outside acquirer.

But the deal now may be in jeopardy, according to two people close to E Ink investors. They say some directors and major shareholders believe the would-be buyer, electronic display maker PVI, is paying too little for the electronic paper technology driving the surging popularity of the Kindle 2 reader.

PVI is E Ink's largest customer, buying its electronic ink - tiny capsules of positively charged white particles and negatively charged black particles - for use in the low-power, high-contrast displays it assembles for the Kindle and other electronic readers. Analysts have projected steep market growth for such devices in coming years.

Russ Wilcox, the company's chief executive and cofounder, discussed the deal with board members this week. Yesterday, he declined to comment on the deliberations of E Ink's more than 100 shareholders, ranging from former employees to venture capital firms, hedge funds, and strategic investors. But he said he remains committed to the deal, which he described as beneficial for both parties.

"My job is very clear," Wilcox said. "I'm marching forward and closing this transaction. I'm 100 percent committed to making this deal close and making it a successful deal. Because of our growth, there is a need for financing, and PVI will inject resources into this business."

Tien-haw Peng, director of strategic planning for PVI, which trades on the Taiwan Stock Exchange, said he hadn't heard about any E Ink shareholder qualms. "My understanding was that all or the majority of the investors agreed to this before the E Ink board approved this deal," Peng said in an e-mail yesterday.

Earlier this month, PVI officials promised to retain E Ink's operations in Massachusetts - its Cambridge headquarters and a South Hadley production plant, which together employ 120 people. E Ink is currently hiring another 25 workers in the state.

The deal is subject to approval by regulators in the United States and Taiwan, as well as by shareholders of both companies. Shareholders of privately funded companies seldom reject buyout deals after they have been made public.

But this case is unusual because the takeover offer stemmed from a financing arrangement negotiated between the parties last summer, at a time when it was difficult for venture-backed companies to raise money. Under the agreement, which wasn't publicly disclosed, PVI agreed to loan E Ink more than $15 million in cash and to invest another $200 million raised from capital markets if it eventually bought the Cambridge company, said two people familiar with the financing. They did not want to be identified because they are not authorized to discuss the deal.

They said the framework of the financing arrangement was negotiated last summer and completed in the fall, just as the credit crunch had made fund-raising all but impossible for other high-tech companies. PVI was given a right to make a $215 million bid this spring, and E Ink's board agreed to bring it before shareholders. That was the acquisition deal unveiled earlier this month.

As part of the financing arrangement, shareholders were given the right to vote the offer up or down, and some of E Ink's biggest investors are now said to be resisting, believing its connection with Kindle 2 will spur a steep growth trajectory for the company, justifying a significantly higher price tag or even an initial public stock offering when the investment climate improves. There have been only a handful of IPOs of venture-backed technology companies over the past two years.

E Ink was founded in 1997 by Wilcox and four partners, including Joseph Jacobson of the Massachusetts Institute of Technology's Media Lab, using technology developed at MIT. Over the past 12 years, it has raised more than $150 million in capital from venture firms, hedge funds, and strategic investors such as Motorola Inc., Intel Corp., and Hearst Corp., which is developing its own e-reader, using electronic ink, focused on delivering news electronically.

No date has been set for the shareholder vote. One of the two people familiar with the deal said a split may be developing between shareholders who want to hold out for a higher price or an IPO and other investors inclined to move forward with the PVI offer and cash out of E Ink. The latter group includes early investors who have backed the company for years.

According to the same person, the purchase price set last year was based on estimates that the company would generate $80 million in 2009 sales. It had $20 million in sales in the first quarter, according to data filed by PVI when it alerted its own stockowners to the deal.

But new internal estimates show E Ink's sales growing faster than expected, putting the company on track to top $110 million this year. That would put the purchase price at less than two times annual revenue, a metric considered weak for private technology companies. Stronger companies typically fetch at least 2.5 to 3 times their annual revenue.

Robert Weisman can be reached at weisman@globe.com.