When you mix an internal bid with complexity there is a reasonable chance the deal benefits one party at the expense of others.
When, within the same proposed transaction, you receive change of control using a “business combination” but no exchange of cash, then more alarm bells go off.
That’s your affairs at San-Diego based, TSC-Venture listed Pivot Technology Solutions, Inc. which has found a clever method to award control to a group of investors which include two of the company’s founders.
That three-person group owns about 30 million shares – or about 18 per cent of the company that generates about $1.5 billion in annual revenue but whose market cap is under $100 million.
Under the proposed deal – that has been given the green light through the board and which is backed by a fairness opinion but nonetheless requires a shareholder vote – the founders will wholly own the successor corporation. In this manner the founders group stands to obtain all the upside.
But everyone else, including John Sculley (Pivot’s chairman and also the former leader at Apple and Pepsi), will give up their common shares and receive preferred shares. (Those prefs are valued at $10. It requires 14.286 common shares to obtain one pref share, meaning each share is deemed to become worth 70 ) Plans demand the distributions around the prefs to become boosted with a factor of three (compared to what’s paid on the common) although the same distributions may also “be deferred.”
Reaction to the transaction continues to be negative.
Torrent Capital, Inc.: The investor “vehemently opposes” the proposed arrangement. “In short, Torrent believes Pivot’s founders are trying to wrestle charge of the company without monetary consideration towards the shareholders.”
Torrent added it met with Pivot’s management per week before the announcement to find methods to enhance shareholder value and the proposed transaction “is wildly inconsistent with any course of action we’d have deemed appropriate in an effort to do so.”
Torrent noted the proposal – that was designed a few months after portfolio manager Jason Donvillle of Donville Kent Asset Management known rumours that Pivot, due to its low multiple, could be taken out either by management or “some private equity guys” – is helpful to the founders. “They would effectively manage the organization without having to put forth any hard dollars to do so. What remains questionable is how the Transaction is beneficial to Pivot’s real owners, the most popular shareholders.”
Cantor Fitzgerald: Inside a note, the firm’s analyst Ralph Garcea said the sale “undervalues,” Pivot. “As such,” said Garcea, the only analyst who covers Pivot, “we would look for a strategic buyer or private equity finance to part of and provide an excellent proposal.” For the reason that note Garcea maintained his buy rating and the $1.50 share target price.
And he reiterated his call for an auction. “Pivot would benefit from an auction tactic to maximize shareholder value.”
Jeff Kinnear: Another investor who has a similar view to Garcea, arguing, “a strategic buyer could afford to pay greater than the current insider bid.”
The market: Within the couple of days since the transaction was announced Pivot’s shares have remained inside a trading range of low to mid $0.50s. That lack of movement suggests the marketplace has little faith the proposal will win the day.
bcritchley@nationalpost.com
