Editor’s note: Charles Davidson covers the Atlanta tech scene for Local Tech Wire. His column is a regular feature on Mondays.Nasty campaigning is hardly limited to politics.
The Atlanta-based software maker Clarus Corp. is emerging from an ugly six-week proxy fight, pitting its management against a group of dissident shareholders. The spat would’ve done the ruthless campaign strategists James Carville or Roger Ailes proud. In press releases and Securities and Exchange Commission filings, Clarus management and the insurgent shareholders traded such labels as “desperate,” “misleading” and “dismal.”
At one point, the company’s management alleged that the dissident group might want to sell Clarus to a company affiliated with one of the group’s leaders, Warren Kanders. Kanders shot back: “Management has now stooped to attacking me personally through outright lies and innuendo.”
Between April 12 and May 21, Clarus and the mutinous stockowners together filed 45 proxy statements appealing for the votes of shareholders. These were the equivalent of negative campaign ads.
By contrast, last year the company filed one proxy statement.
Ultimately, Kanders and two of his comrades, Burtt Ehrlich and Nicholas Sokolow, won election to Clarus’ seven-member board at the company’s May 21 annual meeting, with 57 percent of the vote. The two bickering sides made nice afterward, at least publicly. Clarus CEO Steve Jeffery said the former adversaries want the same objective: to quickly enhance shareholder value and to run a good company.
Early example of a budding trend
While the mudslinging makes a juicy story line, there’s a more interesting element here. The bruising battle at Clarus appears to be an early example of a trend that could spread — the emergence of vultures feeding on decaying technology companies.
Clarus is a company whose cash in the bank and marketable securities — $113.6 million as of March 31, or $7.30 a share — exceed the company’s stock market value. Clarus’ share price closed at $5.49 recently, giving the company a market value of about $85 million. So, the stock market is saying the company is worth less than the cash it has in the bank.
That’s inherently illogical. But the same is true of some 750 companies, many of them dot-coms, which sport a “negative enterprise value,” according to a story in The San Francisco Chronicle that attributed the statistic to Skiritai Capital, a San Francisco-based investment firm. The head of that firm, Russ Silvestri, has set about buying chunks of shares in companies in this odd position, with roughly the same mission as Kanders et al at Clarus.
They aim to rally shareholders to their idea of selling or liquidating the company and distributing the cash to the stockholders, including of course themselves. It’s essentially a twist on corporate takeovers. Many of the companies that Silvestri has identified are crippled Internet firms that through initial public offerings raised big war chests, in many cases more money than the companies needed, at the urging of commission-hungry investment bankers.
Corporate raiders by another name?
“What you have before you is an interesting phenomenon,” says Omesh Kini, who teaches business valuation courses at Georgia State University’s J. Mack. Robinson School of Business.
Proxy fights like the one waged by the dissident Clarus shareholders were once considered expensive and tilted in favor of management. Corporate takeovers, made famous by the likes of Kohlberg, Kravis, Roberts and T. Boone Pickens, were thus viewed as an easier way to make a pile of money from companies perceived as undervalued.
But Kini says that a couple of changes in the 1990s leveled the proxy battlefield.
First, securities laws changed allowing big institutional shareholders to communicate more freely and thus align their strategies and votes regarding corporate governance issues. Second, ownership of big blocks of shares by institutions like mutual funds or pension funds, became more common and in turn made it easier to pressure management. And, clearly, disenchantment with corporate boards and management has only intensified.
Chris Mangum, a business consultant in Atlanta, has explored the notion of proxy fights at companies with negative enterprise values. He figures it will spread as a new breed of raider, the vulture capitalist, emerges. Only this breed of financial engineer is often known as a “shareholder activist.”
At Clarus, Kanders’ group excoriated the company’s management for piling up losses that helped puncture a share price, which briefly soared above $140 in March 2000. The shares have traded below $10 since November 2000.
Sale or liquidation?
Clarus’ management is not dealing with amateurs.
Kanders, 44, is chairman of Armor Holdings Inc., a manufacturer of security products for law enforcement personnel and the world’s largest passenger vehicle armoring manufacturer. He’s also an independent investor and financial consultant.
Ehrlich, 62, is an individual investor and chairman of Langer Inc., while the 52-year-old Sokolow is a law partner in Sokolow, Dunaud, Mercadier & Carreras, a firm heavily involved in merger and acquisition work with offices in New York, Paris, London and Atlanta.
Together, they own roughly six percent of Clarus’ stock, most of which they’ve bought in the past few months. They contend that by forcing management to sell the company, shareholders will get a better financial payoff than if Clarus remains independent under the current management’s stewardship.
A sale or liquidation would indeed likely fetch a premium over the recent stock price. But people who bought shares for north of $10 might not feel as sanguine.
Like it or not, the carrion feeder is a natural part of any ecosystem.