Veramark is back from the grave — Who benefits and what happened?

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In a recent posting (here) I wrote about the announced sale of Veramark Technologies, a North American based Telecommunications Expense Management (TEM) provider, to Varsity Acquisition LLC and All Big Ten Holdings, Inc. at a per share price of $0.98 per share.

With reference to my gain and under the heading “Financial Hijacking,” I wrote:

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 …

Today, Veramark Technologies announced in a press release that the deal has been cancelled by the company itself, who has secured another offer during the go-shop period. In the press-release the company said:

… that it has entered into a merger agreement with Hubspoke Holdings, Inc. …. and TEM Holdings, Inc. …, pursuant to which [TEM Holdings, Inc.] has agreed to offer to purchase all of the outstanding shares of Veramark Common Stock and in-the-money options for $1.18 per share …

The announcement confirms, of course, my view that the per share price of $0.98 did not reflect the value of of the company, since, in a free market economy, subsequent to the submission of a bid, the presence of another, higher bid indicates that the first bid was for less than the value of the object being sold. Moreover, the enormous difference between the per share price in the first and the second bid, $0.20, or a staggering near doubling of the premium of the first bid (the premium of the first bid, 29% over the closing price of the company’s shares on April 30, 2013, the day of the announcement of the sale to Varsity Acquisition LLC and All Big Ten Holdings, Inc., is dwarfed by the premium of the second bid, 55%.)

“Hooray,” I hear… But wait… who, exactly, is the hooray for?

Wait, who?

Who is Hubspoke Holdings, you ask. Go here to find out.

Varsity Acquisition LLC

The cancelled sale has a direct penalty, with Varsity Acquisition LLC and All Big Ten Holdings, Inc. being entitled to a $500,000 breakup fee, payable within five days.

The number of outstanding number of shares on March 31st, 2013, was 10,879,499. On May 9th, 2013, Varsity Acquisition LLC filed an SC 13D filing stating that effective as of April 30th, 2013, it held 255,023 shares (more than 2.3% of the 10,879,499 outstanding shares.)

In its filings, Varsity Acquisition LLC, furthermore, attested that “[n]either Varsity nor the persons set forth on Schedule A [the principals of Varsity Acquisitions] has had any transactions in the Shares within the past 60 days,” and, so, assuming that these 255,023 was acquired at an average per share price of $0.60 (the average per share price from January 1st, 2013, through February 28th, 2013 — a period where, according to the information available from Yahoo Finance, the number of shares traded was 318,900,) then the expenditure amounted to $153,014.

Between the announcement of the first sale, on April 30th, 2013, and the announcement today, June 17th, 2013, of the second sale, 1,608,700 shares have been traded at an average per share price of $0.97, for a total transaction value of $1,560,439. Over the last two days, the number of shares traded has been zero.

If we make a broad assumption that the entire volume traded between April 30th, 2013, and today constituted purchases by Varsity Acquisition LLC and we make an assumption that Varsity Acquisition LLC’s expenses in relation to the sale were $250,000 or less, then today’s announcement by Veramark Technologies yields net gain of almost $750,000 (computed as the break-up fee plus the assumed profit on the acquired shares (ignoring, of course, transaction costs) less the estimated expenses.)

For a quite modest deployment of capital over a relatively short period, that is arguably a handsome return.

Note, that the broad assumption about the volume is just that… an assumption. However, as an assumption goes, this is, I think, a pretty good one.

The insiders

In a recent 8-K filing, Veramark Technologies wrote:

Prior to Varsity being obligated to launch the tender offer after the go-shop period, certain officers and directors of the Company holding, beneficially or of record, approximately 787,905 shares of Company Common Stock in the aggregate, which represents approximately 7.1% of the shares of Company Common Stock presently issued and outstanding, will enter into Tender and Voting Agreements ….

Assuming that these 787,905 shares constitutes the shares held by the insiders, then with today’s announcement the insiders, as a group, realized an additional $157,581 in profit on the sale of the company when the second buyer stepped in.

This, however, is probably only a partial amount since the shares in questions are those that can be voted, most likely excluding non-exercised options. From the DEF14-A filed on April 4th, 2012, we can quantify the total number of shares for Board of Directors members and the Executive Officers as being at least 1,025,675, with 461,000 shares of these shares being common stock these members and executives have the right to acquire pursuant to options issued under the company’s incentive plan, and 297,667 shares of restricted common stock issued to named executives. And, so, the insiders, as a group, might actually have realized an additional $205,135 or more in profit on the sale of the company when the second buyer stepped in

In a related 8-K filing, the company announced that it, on April 30th, 2013, had entered into:

… Change in Control Bonus Agreements (the “CIC Bonus Agreements”) with certain of its executive officers, including: Anthony C. Mazzullo, President and Chief Executive Officer, Ronald C. Lundy, Senior Vice President of Finance and Chief Financial Officer, Joshua B. Bouk, Senior Vice President of Strategic Services, and Thomas W. McAlees, Senior Vice President of Engineering and Operations.

Each of the CIC Bonus Agreements is effective from April 30, 2013 until the earlier of a Change in Control, as such term is defined in the CIC Bonus Agreements, or December 31, 2013. Each CIC Bonus Agreement provides that, subject to the continued employment of the executive with the Company through the occurrence of a Change in Control, the Company will pay such executive a lump sum cash payment within five days following the Change in Control, as follows: Mr. Mazzullo – $40,000; Mr. Lundy – $20,000; Mr. Bouk – $20,000; and Mr. McAlees – $25,000.

In aggregate, therefore, this change of control bonus agreement provides for earnings of $105,000 to the insiders, and, accordingly, with the new sale, the insiders, as a group, appear to have netted at least an additional $310,135. Not a bad return for what I would think is really very little work — in particular if the executives get to keep their jobs and perhaps even get a new set of incentive options.

The common shareholder

Some common shareholders will benefit from the $0.20 increase in the per share price, but shareholders holding the estimated 1,608,700 million shares that we assume went to Varsity Acquisition LLC between April 30th, 2013, and today certainly will not.

I am one of these shareholders, and the net impact to me is a shadow loss of $8,365 on 41,825 shares.

As I wrote in my previous posting, I understand that there is the risk of selling of early, rather than waiting for the dust to settle:

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.

The fact that I understand that there is this risk, however, does not mean that I do not feel irritated by what went down here. As I wrote in the above, it was very clear to me that Veramark Technologies is worth far more than the $0.98 per share that was offered in the first sale (and, in fact, is worth more than the $1.18 that is now offered,) and, so, the fact that I do not achieve a higher return than I did (whether is was an additional $8,365 or and additional $63,574, reflecting the $2.50 per share price that I think the company is worth) is, in my view, the fault of the Board of Directors, who did not do a good enough job at, from the outset, getting the best purchase price from the outset (and, therefore, are incompetent and not qualified to be members of a Board of Directors.)

With respect to the executives they can to a certain extent be excused because they, apparently, were not subject to sufficient oversight by the Board of Directors. In spite of the the fact that I think that the Board of Directors are at fault, however, does not completely relieve the executives of the management team of responsibility, since, for sure, they have significant ability to influence decisions. Moreover, in this specific case, the executives may, I think, have gotten confused about whose interests they were expected to primarily protect — their own or that of the shareholders.

Irritation aside, my notion of this kind of thing is that, as a shareholder and co-owner, the one thing that one could — and should — do is to make a note of the executives and the Board of Directors members for future references.

So, for the purpose of common shareholders’ evaluation of future performance by management teams, here are the Executive Officers of Veramark Technologies: Mr. Anthony C. Mazzullo, President and CEO; Mr. Ronald C. Lundy, Senior Vice President and CFO; Mr. Joshua B. Bouk, Senior Vice President; and Mr. Thomas W. McAlees, Senior Vice President.

And here are the Board of Directors members of Veramark Technologies: Mr. Ronald J. Casciano, Mr. Seth J. Collins, Mr. Charles A. Constantino, Mr. John E. Gould, Mr. Anthony C. Mazzullo, and Mr. Steve M. Dubnik

Was there a leak?

With the revelation coming out of the prosecution of the Magellan fund and employees of SAC (read more about this here,) it is becoming more and more clear that the financial industry is driven to a substantial degree by insider tipping and insider trading.

I was reminded of this fact, when I read the previously discussed disclosure by Varsity Acquisition LLC, that:

[n]either Varsity nor the persons set forth on Schedule A [the principals of Varsity Acquisitions] has had any transactions in the Shares within the past 60 days

In my earlier posting I had referenced a substantial activities in the days before April 30th, 2013:

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.

I had originally assumed that the bid for 500,000 shares was some sort of preemptive buy by Varsity Acquisition LLC, but in view of the disclosure, this appear to not be the case, which raises the question of who put in this massive order in the days before April 30th, 2013, and why they did so immediately before the announcement the acquisition. This question becomes even more pertinent if we review the trading in the 60 days before April 30th, 2013:

(c) Per Jacobsen, 2013. All rights reserved

(c) Per Jacobsen, 2013. All rights reserved

The 70,000, or so, shares traded during the 5 trading days before May 1st, 2013, which were traded at a price of around $0.75 (I paint with a broad brush here,) in themselves would give rise to a profit of $30 thousand, or so, and, of course, a remarkable stroke of luck in timing — easily the envy of lucky Stevie Cohen, I think.

Participate, please….

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