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Geeknet (LNUX) - Large Institutional 13D Shareholder Put Pressure On Board Demanding to Unlock Value. Where is Geeknet now 21 Months Later?

November 25, 2009 – Comments (5) | RELATED TICKERS: AMZN , BBY , GKNT

On February 18th, 2008 TakingTheStreet.com  reported that

"...SourceForge, Inc. (NDAQ:LNUX) is starting to feel the pressure from a large institutional shareholder calling for the web services company to unlock value through a share buyback. Trivium Capital Management, which owns a 10.1 percent stake, recommended on many conference calls and discussed with management the possibility and importance of a stock buyback. Many investors are grateful for the intervention as they have had similar concerns about the company’s overcapitalization and fear that it may make acquisitions that could hurt it going forward.

The activist hedge fund argues that SourceForge has gone through many transformative changes during the past year, but the overall business plan has been mediocre at best. This has resulted in a modest enterprise value of $60mm with a total market capitalization of $120mm, leaving the equity value of the business at $60mm. Clearly, this is unacceptable in terms of the valuation metrics that Wall Street is ascribing to the business prospects of the firm. The board has a fiduciary responsibility to shareholders to close this valuation gap and enhance shareholder value. 

Trivium suggested that a share buyback may be the best option as it could result in a stock price between $5 and $15 per share. -source: February 18th, 2008 TakingTheStreet.com..."  

Source: Taking the Street.com Feb 18, 2008.

Where are we today?

LNUX closed at $1.78 on February 15th, 2008. This article was originally published on Monday February 18th.  LNUX closed at $1.20 yesterday, November 24th, 2009. In other words, LNUX management has incurred 33% shareholder value destruction since Trivium made this demand(4) of LNUX Management and its Board of Directors on February 14th, 2008. See Trivium Capital Management Sends SourceForge a 13D Valentine.

Key results since Trivium Letter to LNUX Board Of Directors(4):

Shares outstanding 02/18/08(1): 68,466,186  10/30/09(3):  60,475,493.  11.67% share buyback 

Market cap 02/18/08(1): $120M 11/24/09(3): 71.97 Shareholder Value Destruction: --> 40.02%

Enterprise Value 02/18/08(1): $60M  11/24/09(3) $37.97M  Shareholder Value Destruction: --> 36.72%

Shareholder Equity 02/18/08(1): $60M   09/30/09(3): 46.07M   Shareholder Value Destruction: --> 23.22%

/s/ chaosunplugged, shareholder activists...to ensure a management and Board of Directors Of the shareholders, by the shareholders, and for the shareholders (tm), (sm)...(c) 1996 - 2010 copyright chaosunplugged (tm). All rights reserved.

References: 

1. Source: 10-Q Filed 3/11/2008 for the Period Ending 01/31/08.

2.  SourceForge Shareholder News, March 24, 2009. Where is LNUX One year later after 13D Shareholder Flexes Muscle?

3. Source: 10-Q Filed 11/09/09 for the Period Ending 09/30/09.

4. Trivium Capital Management's 02/14/08 Letter to LNUX Board Of Directors 

LETTER TO BOARD OF DIRECTORS 

February 14, 2008

Robert Neumeister, Jr. 
Andrew Anker 
Ram Gupta 
Scott E. Howe 
Ali Jenab 
Carl Redfield 
David B. Wright 
The Board of Directors at SourceForge

650 Castro Street 
Suite 450 
Mountain View, CA 94041

Dear Mr. Neumeister, Jr. and The Board of SourceForge,

We are writing to you in our role as a significant institutional investor, Trivium Capital Management. We are the second largest institutional holder of SourceForge. We have asked on many conference calls and discussed with Mr. Jenab the possibility and importance of a stock buyback. We would ask that the Board of Directors discuss this during your next meeting.

In general, while the company has gone through many transformative changes in the past year, the overall business plan execution on the core business has been mediocre, at best. This has resulted in the EV (enterprise value) being a modest $60m with a total market capitalization of $120 million, thereby leaving the equity value of the business at $60m. And this excludes the value in Collabnet which the company can choose to monetize at some point in the future. Clearly, this is unacceptable in terms of the valuation metrics that Wall Street is subscribing to the business prospects of SourceForge. As Chairman and Members of the Board, you have a fiduciary responsibility to enhance shareholder value.

Our suggestion of a buyback versus the company putting itself up for sale is one of respect for Mr. Janeb, Mr. Sobel and the employees on the expectation of better execution of their business plan to monetize the company's strong, sticky websites and customer traffic. On any generally accepted metrics for valuing unique users, Mr. Jenab has opined that the value per unique user to an acquirer could be from $10 to $70 for SourceForge properties (based on market transactions for similar properties). This could result in a stock price between $5 and $15 per share depending on your assumptions. As such, we believe a meaningful buyback is in the best interest of shareholders and the company for the following reasons:

1) In review of 2008-2010 earnings it is highly accretive to EPS.

2) In a sale of the company if would add to the price per share.

3) The company has too much cash both in view of the revenues and as a percent being over 50% of equity value.

4) The company has cash far above their acquisitions needs.

5) It would send a message to investors and company employees that the company believes in itself.

6) It might increase the price per share which would benefit shareholders and help lower the cost of employee retention.

We are recommending that the company do a 10 million share buyback. This would leave the company by the time the buyback it is completed (assuming the stock stays weak) with approximately $40 million in cash more than enough to run the company and do small acquisitions. In addition the company could consider selling the Collabnet holding for more cash to fuel a larger buyback. It is our belief that with all the major changes going on at Sourceforge that a significant acquisition would be disruptive and high risk.

We understand that these are difficult economic times and the company is in a transition period. As a significant shareholder we believe that the company can prosper and improve their long term growth prospects looking forward. We hope the Board will also believe in the long term outlook and initiate a buyback now while the stock is down.

In the event management is unable to execute in 2008, I believe it would be appropriate to seek strategic alternatives.

If I can be helpful in any way please do not hesitate to contact us. Thank you for your consideration.

Yours truly,

Rob Feinblatt 
Managing Partner 

Trivium Capital Management