December 8, 2000: 4:25 p.m. ET

DSL provider seeks relief from Verizon for terminating their merger plans

NEW YORK (CNNfn) - Northpoint Communications filed a lawsuit against local exchange carrier Verizon Communications Friday, seeking up to $1 billion in damages as compensation for Verizon's decision last week to terminate an agreement to merge their DSL operations.

Northpoint (NPNTQ) alleges in its suit that Verizon's decision to dissolve the merger was without legal or factual basis under their agreement, but rather was based on negative reaction to the deal on Wall Street.

Specifically, the San Francisco-based company contends that Verizon terminated the deal primarily because of criticism it was receiving from shareholders and analysts. The company also contends Verizon wanted to announce increased near-term earnings estimates to boost its slumping stock price, something it could not do while it was digesting the merger.

"We have carefully considered our response to Verizon's actions and we intend to pursue this matter completely to ensure that Verizon either closes the deal with Northpoint or that Northpoint receives the full compensation and benefits to which it is entitled under law and the merger agreement," said Liz Fetter, Northpoint's president and chief executive, in a prepared statement.

Verizon, the No. 1 U.S. local telephone company agreed in August to invest roughly $800 million in Northpoint in exchange for a 55 percent stake in the company. Verizon also agreed to merge its own DSL business with that of Northpoint's, a merger both companies initially hailed would change the competitive landscape in the broadband industry.

Of its $800 million investment, approximately $450 million was earmarked to fund Northpoint's operations, with the rest to be distributed in payments to each NorthPoint shareholder of $2.50 per share.

The New York-based Verizon (VZ) has repeatedly maintained that it terminated the agreement because of Northpoint's deteriorating financial, business and operating conditions. Northpoint announced on Nov. 20, just nine days before Verizon pulled out of the deal, that it was revising its fiscal third quarter results downward because of deteriorating revenue, an eroding customer base and material increases in net loss.

Northpoint now contends that Verizon's claim was not only false, but it offered no legal precedent for the company to scuttle the arrangement.

Indeed, Verizon's stock plummeted nearly 23 percent shortly after announcing the Northpoint arrangement, hitting a new 52-week low of $39.06. The stock has rebounded since that time, however, and jumped an additional 7 percent in the days following its decision to terminate the agreement.

Verizon's stock shed $1.69 to close at $56.19 Friday while Northpoint closed unchanged at 41 cents per share. Northpoint shares have fallen nearly 99 percent from their 52-week high of $34.75.

Analysts have predicted that Northpoint will have trouble surviving without the Verizon funding.