Is a gain of $14,478.90 enough?

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Exiting Veramark

3641567660_081338508f_oToday Veramark Technologies, a United States based Telecommunications Expense Management (TEM) services provider, announced that it has entered into a definitive agreement to be sold for $0.98 per share in cash, representing a 38% premium over the 90-day average price of the company’s shares and a 29% premium to the closing price of the company’s shares on April 30th, 2013.

I have followed Veramark Technologies and its equity for a long time, and I have written about the company in two postings on this blog.

In the first posting (here,) published on February 5th, 2013, I noted that the company probably was strongly undervalued, writing that:

In fact, at this stage, it would, I think, take a macro-economic event, malfeasance, or near-criminal stupidity on behalf of the company’s management for Veramark Technologies to not be able to record significant progress for the 2012 fiscal year, and the company should be well positioned for an ascent in revenues, earnings, and market capitalization throughout fiscal year 2013.

Assuming that the net income for the fourth quarter of fiscal year 2012 turns out to be $0.03, a $0.01 improvement over the third quarter, for earnings per share of $0.07 for the fiscal year, and assuming an average per share price of $0.55, then trailing twelve months’ P/E will be approximately 8. If the per share price holds at the $0.55 level and the company achieves $0.03 in EPS per quarter for the next fiscal year, the P/E for the 2013 fiscal year will be approximately 4.5, a bargain by any measure.

In the second posting (here,) published on February 20th, 2013, I commented on the company’s earnings and the recent taking of a significant position by an institutional investor, noting that the earnings results were excellent:

Excellent news in itself, but almost insignificant compared to what it means for investor sentiment. With these earnings figures the company’s trailing twelve months’ (TTM) P/E ratio is restored to a meaningful number, rather than the N/A limbo that it has been in for almost two years, through calendar year 2011 and most of calendar year 2012, and with a rare exception in calendar 2010, for almost three years before then (year-end earnings for fiscal years 2008 through 2011 were -$0.05, -$0.06, $0.02, and -$0.12, with cumulative losses for this period being $2.07 million, bringing the company’s liquidity into crisis territory and increasing the accumulated deficit from $24.1 million to $22 million.

For VERA, the fact that Veramark Technologies’ TTM P/E is definable will be a first step to restoring liquidity and, in turn, grow the per share price.

Excellent news… but — as they say in infomercials — wait.. there is more. Over a very short period Peter H. Kamin, an institutional investor, has gobbled up 1.02 million VERA shares, representing almost 10% of the outstanding shares and handily stabilizing the equity. A decision he will probably not regret given the approximately 15% increase in the per share price between yesterday’s announcement and today.

The press release announcing that Veramark Technologies was being sold was certainly news, but not totally unexpected (more about this, below.)

Over the last months I had accumulated 41,825 VERA shares at a cost of $26,352. With a locked in per share price of $0.98 my back of the envelope calculations point to unrealized gains of $14,478.90 (for the sake of simplicity I ignore sales cost and fees,) or 34.9%.

In reality my realized gains ended up being slightly less, $13,224.15 or 33.9%, because I was not willing to wait for the price equilibrium at $0.98 per share, but, rather, liquidated the position at $0.95 per share (more about this, too, below.)

Financial Hijacking

A gain of $13,224.15 is, of course, not shabby — particularly when we consider the time-line, but it is a far cry from what I think that my investment in the company is worth, and although the $0.98 per share price does constitute a significant premium over the market price for the VERA equity, I think that the sale of the company at this price, although probably legal, constitutes financial hijacking, a phenomenon that I wrote about in a recent posting about Click Software (here).

As I have written about in the past, my investment paradigm has many challenges, including the need for an infinite time-horizon and the ability to stand alone. The risk of financial hijacking is also a challenge — and a particularly distinct one at that, since, under the investment paradigm, a key requirement for the decision to invest in a company’s equity is that the equity is substantially undervalued, and since no one will be more keenly aware that a company is undervalued — and be in a position to capitalize on such undervaluing — than the company’s management and Board of Directors (in Forensic Fraud terminology, the company’s management and Board of Directors possess all three components of the Fraud Triangle (read more about the Fraud Triangle here): Pressure, Opportunity, and Rationalization.)

Naturally, Veramark Technologies’ management and Board of Directors have taken great care in ensuring that its process for the sale followed the customary process, including even a go-shop period, and ensuring that the offering price appear fair by framing as a significant premium to the ridiculous market price, as detailed in this morning’s press release:

A special committee of the Company’s Board of Directors, consisting solely of independent directors, and the Company’s Board of Directors have both unanimously approved the transaction. The Special Committee undertook deliberate and comprehensive negotiations with Varsity to obtain an attractive cash offer for the Company’s shareholders. In determining whether to approve the transaction, the Special Committee also obtained and considered a fairness opinion from an independent third-party advisor. The Special Committee ultimately concluded that Varsity’s offer is fair to, and in the best interest of, the Company’s shareholders.

Under the terms of the agreement, Merger Sub will commence a tender offer to purchase all outstanding shares of the Company on the fifth business day following the end of a 45-day “go-shop” period. 

Varsity refers to Varsity Acquisition LLC, the buyer, and Merger Sub refers to All Big Ten Holdings, Inc., a subsidiary that appears to have been set up by Varsity Capital Acquisitions for the purpose of executing the transaction.

This sort of thing happens all the time and, generally, is an unavoidable risk or side-effect of executing under an investment paradigm that focuses on capitalizing on under-valued properties. Generally, although in these situations there might be a crime hidden in all the smoke and mirrors and tenacious litigation may be able to flush such crime out and although it is possible that the first offer will be replaced by a later, better offer, it is my experience that the best thing to do is to capture whatever gain one can and move on to other pastures as quickly as possible. Therefore, I take my $0.95 per share, rather than waiting for the $0.98 that I may be able to collect over the next month — or even a hypothetical higher bid.

And so we move on to the next thing….

Moving on …. Wait, not so fast

But before we go it is worth reflecting on two points in time where I appear to have missed out on capitalizing further on today’s events.

First, although I knew that the company was significantly undervalued, I committed only $26,352. The principal reason for this low level of commitment was not a doubt about the company’s prospect or the undervaluing of the company, but, rather, a simultaneous commitment of capital elsewhere. Specifically, I have over the last months had to decide on whether to invest a floating reserve in Unitek Global Services, MER Telemanagement Solutions, and Veramark Technologies, each company satisfying the criteria in my investment paradigm. Unfortunately, Veramark Technologies lost out to Unitek Global and MER Telemanagement. My conservative estimate is that if I had decided differently, my total realized gain would have exceeded $50,000.

The second, much more acute opportunity came this week, when I discovered that there was a massive Bid position in VERA, at 500,000 shares for $0.70 per share, with a corresponding massive Ask position, at 100,000 shares at $0.75 per share. This, of course, was a clear indication of what was to come. Had I at this point in time, shifted $75,000 worth of my position from MER Telemanagement Systems’s equity to VERA, my realized (and highly transactional) gain would have been $20,000 for a few days position holding (in fact, the time span would have been so short that the first trade, securing the 100,000 VERA shares, probably would not have settled before the second trade, selling the acquired shares, kicked in.)

So, you ask, do I regret not taking a larger initial position and/or not jumping on the opportunity to take on an additional 100,000 shares in Veramark Technologies? No, not really. My investments in MER Telemanagement and Unitek Global still appear sound to me, and I am convinced that at least one of these investments will lead to a significant gain. Shifting some of my position in MTSL, MER Telemanagement’s equity, into VERA appears on the surface to be a no-brainer, but such decision is understood in retrospect and investments, unfortunately, are conducted in a forward manner.

In fact, being a perpetual optimist, these two missed opportunities to increase my gains have mostly served to increase my expectation for return on my investments in Unitek Global and MER Telemanagement — and probably more so for MER Telemanagement (you can read about the opportunity that I see with MER Telemanagement here) than for Unitek Global, since a large part of the MER Telemanagement’s business is TEM centric, and, so, the sale of Veramark serves to validate the business of MER Telemanagement.

So, I will pay my taxes on the gain and then, probably, apply the balance of the gain plus the original investment to buying more MTSL and UNTK.

Onwards and up!

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