Monday, May 4, 2009

Penny Ante Arbitrage Update III

In previous posts ("Penny Ante Arbitrage" and "Penny Ante Arbitrage Update") I mentioned that I bought 749 shares of Asure Software (Nasdaq Capital Market: ASUR) at between 17 and 18 cents per share in several different accounts, in the hopes of getting them cashed out at 36 cents each after the company's proposed 750-1 reverse split (the first step in the company's plan to go private). Today, a hedge fund issued a press release ("Pinnacle Fund Issues Letters Requesting Asure Software Abandon its Pending Go-Private Transaction, Requests Shareholder List.") opposing the company's plan to go private. Excerpt:

NEW YORK, May 4 /PRNewswire/ -- Pinnacle Fund (controlled by Pinnacle Partners, LLC which is partly controlled by Red Oak Partners, LLC) announced today that it has issued two letters to Asure Software ("ASUR" or the "Company") requesting that its concerns be addressed, including: a) calling a 2009 annual meeting - thus far ASUR's Board has failed to call nor indicated its intention to call such a meeting; b) excess compensation at the senior management level; c) increasing shareholder representation on a Board which currently has very low insider stock ownership and representation along major shareholders; c) the inability of management to historically forecast its business; and d) an imprudent going-private transaction despite the Company's ability to realize the bulk of ASUR's stated cost savings while remaining public as well as to save additional monies by not paying out certain stockholders at 2x current market price levels. Pinnacle's first letter was issued on April 17th, 2009, followed by a second letter and a shareholder list request issued on May 4, 2009. The letters ask for "immediate and radical changes in the cost structure" to better align costs with revenues and that ASUR abandon its pending go-private transaction and instead effect immediate changes - inclusive of Board changes, setting a date for its annual meeting, and enacting both a reverse stock split in order to satisfy NASDAQ minimum price requirements and an active stock repurchase program.

David Sandberg, the portfolio manager of the Pinnacle Fund, further states, "We would still like to work with the Company's current board and management to address and resolve our concerns. But unless the board and management withdraw from this go-private proposal and map out a workable strategy to restore profitability, our ability to work together appears limited and a proxy fight more inevitable."

According to its 13-D amended today, Red Oak Partners owns 7.35% of the outstanding shares of Asure Software (Nasdaq: ASUR), which it acquired this year. In its two recent letters to Asure's management, Red Oak criticized the company's recent mismanagement, and questioned whether it was necessary to go private to achieve significant cost savings. For example, Red Oak noted that, as a micro-cap company, Asure could save money by hiring a less expensive, smaller auditing firm than Ernst & Young.

David Sandberg of Red Oak Partners was kind enough to spend a few minutes on the phone with me discussing this today, and, in addition to reiterating some of the points in his two letters to Asure's management, he mentioned that he invested in this stock with a higher price target in mind than 36 cents per share. He said that he could have easily had an assistant open a bunch of accounts holding 749 shares each, but he thought he could unlock more value by getting more effective management in place. He noted the cash on the company's balance sheet, that both of the company's businesses are high-margin ones, and said he thought a 70 cent price target was reasonable for the stock, given more effective management.

I'd be happy to take the 36 cent bird in the hand over the 70 cent birds in the bush here, and I imagine most small shareholders would be as well. We'll see what happens.


DaveinHackensack said...

I had e-mailed a representative from ASUR as well, and got an e-mail back (asking if we could talk by phone tomorrow) just after I posted this. If that conversation takes place, I'll post notes on it.

Alex Garcia said...

Good luck with it Dave. im not a fan of penny stocks and will be cheering from the sidelines

DaveinHackensack said...

Thanks, Alex. Let me know when you launch your investment newsletter business.

Sivaram Velauthapillai said...

Too bad this seems to be falling apart. I was thinking of investing in it. I hope it works out for you Dave.

On the positive, even if the going private transaction fails, the fact that this fund owns quite a sizeable position and thinks it is worth a lot more must help in the long run.

DaveinHackensack said...

"Falling apart" seems to be something of an overstatement, Sivaram. Red Oak Partners has to get the company to schedule an annual meeting, solicit proxies, and get a majority of shareholders to vote for its slate of directors, all in less than a month. My estimate is that most of the company's shares are in the hands of small shareholders who would be eligible for the 36 cents per share cash out.

I confess I am a little torn after reading Sandberg's letters (to which I linked in the post). Sandberg's criticisms are on target, and if ever a management team deserved an activist shareholder to give it the boot, it's Asure's management team. In fact, if I hadn't sold my original position in ASUR, which I sold for a large loss, I'd probably be rooting for Sandberg and his Red Oak Partners here. But I made peace with with ASUR's managers -- and the folly of my initial purchase of the company's shares -- some time ago.

As for risk, this is a $5 million market cap company with an enterprise value of -$7 million. Not a lot of risk at this level, IMO. Worst case scenario would be a death match between the activists and the current management that stops the current go-private plan but doesn't wrest control of the company from current management. I don't see that happening. In either case -- if the activists oust current management or the go-private plan goes through, I expect to make a profit on this small investment. We'll see though.

DaveinHackensack said...

Incidentally, I received proxy notices for ASUR yesterday via regular mail for another three accounts.

DaveinHackensack said...

One correction I should make to my May 5th comment: Red Oak doesn't need to

"get the company to schedule an annual meeting, solicit proxies, and get a majority of shareholders to vote for its slate of directors, all in less than a month."to block the go-private deal. To do that, it just needs to convince enough shareholders to found against the deal on ASUR's current proxy. That may be a tall order on its own, as most shares seem to be owned by small retail shareholders who stand to gain from the cash-out, since the company expects the shareholder count to drop from ~10,000 to fewer than 300 after the first 750-1 reverse split, but in my May 5th comment I incorrectly conflated what Pinnacle would need to do to oust ASUR's current management with what it would need to do to stop the go-private deal.