When I was struggling through the first year of Philosophy, studying, I think, epistemology, the teacher, a theologist, posed a causality question to the class: If, as I am driving on the highway, I decide that I want to listen to music, and then, exactly when I touch the on/off button on my radio, the car in front of my car is blown to smithereens, what can I conclude.
My answer, marking the beginning of my rapid and steep decline in not just this particular class, but in all classes in the entire first year, was that I would immediately flip the button off and then on again and observe if another car got annihilated. If it did, well… then I might want to be more careful next time, I wanted entertainment while driving.
What I did not say, of course, was that the idea of having deux ex machina like powers both intrigued and pleased me deeply, and, in fact, I was likely to push the button again simply because that sort of power was, in a word, intoxicating.
I was reminded of this causality-centric moment recently, when Yahoo started rolling out its new message board front-end, and I learned that this new front-end just so happens to implement certain key recommendations that I had made in a recent posting discussing spam on Yahoo message boards. I had one of those Fourth Wall moments where our protagonist — Harold Crick in Stranger than Fiction, if you will — hears the author’s voice describing his actions.
Just as I was starting to allow myself to believe that I might have divine power and started contemplating writing a posting about world peace — just as an experiment, you know — Unitek Global Service came along and striped me of any belief that I might have about the power of my writing.
Hubris — Divine justice by ways of Unitek Global Services
I have followed Unitek Global Services for a while, and in March, having reviewed the fundamentals and recent developments — and for a variety of reasons that I will not bore the reader with at this time — I believed that investment in the company’s equity (Nasdaq:UNTK) would yield a significant medium and long term opportunity, and, consequently, I accumulated a sizeable position.
While I was accumulating my position, I wrote a couple of postings on the Yahoo message board for the equity, detailing my reasoning for accumulation and laying out three basic intermediate victory conditions: 1) the company must focus on operations, converting a $500 million backlog into revenues in its fiscal year 2012 while building a new and even stronger backlog, 2) the company must avoid overpaying for its new Chief Executive Officer (the previous CEO was… well gone,) and 3) the company must avoid further turbulence in the form of management change (and associated extra-ordinary charges against revenues) and avoid entering into further acquisitions, reflecting my observation that a previous acquisition had cost far more than the market had found acceptable.
Well, as if though the Board of Directors had read my postings and was hellbent on proving me wrong, the company promptly hired a CEO, applying selection criteria that I, for one, did not understand, and paying this new CEO generously (to the tune of more than $1 million in yearly compensation) — a decision process that I wrote about in a posting on this blog in which I questioned the hiring by viewing it from the perspective of a Martian landing on earth and conducting an anthropological study.
The first earnings call with the CEO, for the second quarter of the fiscal year, occuring immediately after the new CEO’s hiring, was so-so, with the CEO repeatedly expressing $1 million worth of appreciation of the operational performance of the Unitek team, which during the 7 months or so without a CEO had done exactly what I would ask and expect, wiz that they had executed on operational issues without being distracted by exotic issues such as mergers and acquisitions and corporate restructurings. Naturally, I would expect nothing else from the new CEO, since he really had had no material impact on the operations during the first two quarters of the fiscal year, and, therefore, probably, could not be expected to say anything meaningful.
The results for the second quarter confirmed my assumptions about the company’s ability to convert backlog to revenue while building out a replacement backlog that was larger than the backlog being converted, and in August the market took notice, reversing the per share price for the company’s equity, which had been declining since the company encountered trouble in the previous fiscal year.
From August through September the per share price increased from $2.47 to $4, an appreciation of $1.53 or 62% in less than one and a half month. Needless to say, I was pleased in spite of the company’s Board of Directors having violated one of my core victory conditions by paying top dollar for a CEO. Mostly, I was hopeful.
Then in the morning of September 13th I became slightly frustrated when the company announced that it was getting rid of its Chief Administrative Officer to the tune of almost $1 million in restructuring charges against the third quarter of fiscal year 2012. (Note: I inferred from the fact that benefits were being paid to the CAO that the separation was not instigated by the CAO and, further, that the separation was not for cause — but I may, of course, be wrong!)
Since Unitek is a company with a top-line of $500 million, it is, I guess, easy to lose sight of how much $1 million really is, so it is worth putting the number in perspective. The company’s net loss in the second quarter of fiscal year 2012 was $586 thousand, marking a significant improvement over the late part of fiscal year 2011 fiscal and the first quarters of fiscal year 2012, so we are talking about an amount that in that quarter would have improved the net income by almost 200% — and made the company profitable — a huge milestone. Another way to look at it is that $1 million allows for the hiring of 10 field technicians for an entire year, each of which, by my estimate, could contribute more than $200,000 in revenues.
Really, this kind of thing should not happen. It shakes investors’ belief in the company and unless we are talking about some sort of serious offense by the CAO (in which case there should be termination for cause and no benefits and, therefore, be no restructuring charge) this sort of change is not appropriate at this time. If the new CEO felt that he could not get along with the CAO, he ought to have sucked it up and found a way to make it work — after all that is the level of maturity that we should expect from anyone paid $1 million or more per yar.
Regardless of the scope of the change, we now were in a situation where two out of three of my victory conditions had been violated, and I was frustrated.
And then, before the day was out, Unitek struck again…
In the afternoon of September 13th, after the close of the market, the company announced that it was acquiring another company at a cost of up to $23.5 million, deepening its debt, increasing its risk, and increasing its immediate expenses.
The press release from Unitek, announcing the deal, was very careful to say all the right things, emphasizing that Skylink LTD, the company being acquired, in its 2011 fiscal year had revenues in excess of $31 million and EBITDA of almost $6 million and was expected to generate EBITDA in excess of $7 million in fiscal year 2012 (after post-merger cost reductions,) and emphasizing that the acquisition was expected to be de-levering and improving Unitek’s EBITDA, net income, and working capital profile. All good stuff.
However, the reality to my mind is: 1) that any acquistion and subsequent integration is risky — and risk is something that I would like to not see more of right now; 2) that this acquisition increases the debt burden — and debt is something that I would prefer to see reduced, rather than growing; 3) that post-merger cost reductions normally carries with them extra-ordinary charges — something that I really don’t want to see any more of; and 4) that the Skylink 2012 results are projections — something that I find to be so-so when you are undertaking acquisitions, since one relies on a seller to provide information and there is a clear motivation for such seller to project a positive future.
So I am now highly frustrated, since, in my view, Unitek has now clearly abandoned the relatively risk-free approach that it had operated under in the first two quarters in favor of something else entirely. While I realize that this new, riskier strategy may result in a higher return, I don’t like it, since I now anticipate that we will see a string of extra-ordinary charges in the future and that a needed, future debt restructuring will be harder to achieve (or, if Unitek converts the debt to equity, will be more dilutive on the shareholders — including me,) and I worry that we will find — surprise, surprise! — revenues and EBITDA from Skylink going down in fiscal years 2012 and 2013 instead of going up.
We will see what happens with Unitek and my position in the its equity, I guess. Hopefully I am about to learn something entirely new.
What is for sure, is that my musings do not carry omnipotence, and that the power of my pen — or, as it may be, keyboard — is less than my Yahoo message board experience had lead me to believe.
Money, money, money….
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