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[Update3] Geeknet Disrupt - 9/30 GKNT 52/133 Week High: In Perspective - 31 Months Ago 13D Hedge Fund Shareholder Put Pressure On Geeknet (GKNT) Board Demanding to Unlock Value.

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October 02, 2010 – Comments (9) | RELATED TICKERS: GKNT , YHOO , BBY

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: Taking the Street.com [Note: This link is no longer good] Feb 18, 2008.

Where is Geeknet (GKNT) shareholder value 31 months later?

LNUX closed at $1.78 on February 15th, 2008. The above article ( Taking the Street.com ) was originally published on Monday February 18th 2008.  GKNT (fka LNUX) closed at $1.86 Friday, October 1st, 2010. In other words, Kenneth Langone's "Partners" are arguably/technically still responsible for failing to create shareholder value and conversely for destroying Geeknet (GKNT) shareholder value by 6.0% (by Market Cap after a 11.41% share buyback - one of Trivium's requests) 31 months since Trivium made this demand of LNUX nka GKNT Management and its Board of Directors on February 14th, 2008. 

 

Key financial metrics since Trivium Letter to LNUX Board Of Directors:

 

Shares outstanding 02/18/08: 68,466,186 

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

Shares outstanding as of 9/9/10:  60,651,847. Source: SEC Form DEFR-14/A filed 9/24/10. ->  

11.41% share buyback

 

Market cap 02/18/08: $120M Source: Ibid.

Market cap 10/1/2010: 112.8  Shareholder Value Destruction: --> 6.0%

Enterprise Value 02/18/08: $60M Source: Ibid.

Enterprise Value 10/2/10:  $84.8M  Shareholder Value Creation: --> 41.3%

Shareholder Equity 02/18/08: $60M   Source: Ibid.

Shareholder Equity 06/30/10: $44.4M   Shareholder Value Destruction: -->26.0%

To put all this into perspective, the "Partners", since Kenneth Langone's appearance,  appear to be slowly turning things around.  Of significance, Geeknet shareholder value does not reflect the following events since Trivium's demand letter:

1. The Ohloh and Geek.com acquisitions.

2. Unique visitors to Geeknet owned sites (Thinkgeek.com , Slashdot.org, Geek.com, Sourceforge.net, ohloh.net, freshmeat.net) grew appx. fifty (50%) percent from 32 million unique visitors from 1/31/2008* to 48.4M as of July 2010**.

* Our network of web sites served an average of 32 million unique visitors per month* over the past twelve months (*Source: Google Analytics and Omniture). Source: SEC Form 10-Q filed 3/11/08 for period ending 1/31/2008.

** We serve an audience of 48 million users* each month. (*July 2010 Unique Visitors 48.4M. Source: Google Analytics and Omniture). Source Geek.net

3.  The new SourceForge (8/2010) now run by the recently appointed and promising elizabethn (8/2010).

 

                  ...and more recently (last two weeks)...

 

1. (Sep 29 2010) Spruce Up Your Portfolio With Insider Plays

2.  (Sep 22 2010) ThinkGeek TK-421 could be huge (delivery 11/23, invented at ThinkGeek, covered by Gizmodo and Engadget out of the gate (9/22).

3.  (Sep 27, 2010) Inside ThinkGeek, Where Mythical Meat Can Make Millions W I R E D

4.  (Sep 17, 2010) The Top 100 Web Brands (Geeknet #100).

5.  (October 2010) Kiplinger, 6 Rules for Investing in Internet Stocks and 8 Promising Picks

6.  (Sep 28 2010) "...Quality content is on the acquisitive menu again...", Motley Fool.

7.  (Sep 30 2010) Geeknet, Inc. Reaches 52-Week High; GKNT, NTES, ORCC.

The wildcard - Slashdot.org --> 

(7/29/10) Slashdot Struggles to Remain Relevant in The Social Web RWW

(7/28/10) Is Geeknet (LNUX)s SourceForge Following Slashdot's Foot(Mis)steps?

(6/12/10) Slashdot appears to be becoming irrelevant while recently acquired Geeknet (LNUX) Geek.com has more timely/breaking geek/tech articles. Also see Geeknet (LNUX) Slashdot Nemesis "Digg loses a third of its visitors in a month: is it deadd?" and "Will Slashdot be Overtaken by Digg?" January 2006 for more recent corroboration of Slashdot's declining influence/market share. Source: chaosUnplugged.

(4/23/10) Is SourceForge nka Geeknet (LNUX) About to Blow it a Second* (Third) Time in its Ten Year History? Source: chaosUnplugged.

 

/s/chaosUnplugged, #1 Motley Fool score Leader Red Hat , Citrix Picks

 

Reference:  

(February 21, 2008) Trivium Capital Management Sends SourceForge a 13D Valentine.

(1) 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 

9 Comments – Post Your Own

#1) On October 03, 2010 at 1:45 PM, gnulaw (57.96) wrote:

>>Of significance, Geeknet shareholder value does not reflect the following events since Trivium's demand letter:

 

 

"...Well I think every iPhone user has just died and gone to heaven, and the BlackBerry is about to a take nap for the rest of the night, because the TK-421 iPhone case with flip-out keyboard is here. It feels like the second coming of the infamous iTwinge. In November, Think Geek will enable the impossible and provide us with the best of both worlds by turning your iPhone 4 into a Droid…. or rather, they’ll be launching a case with a built-in keyboard that rotates out when needed. The keyboard connects wirelessly to your iPhone 3GS or iPhone 4 via Bluetooth – Awesome! The TK-421 iPhone case with flip-out keyboard will retail for $49.99. Lets hope that the TK-41 really shows up, an doesn’t end up like the iTwinge that never actually materialized. Can someone please put this in my Christmas stocking this year!..."

Source: (September 22, 2010) ChipChick TK-421 iPhone 4 Case with Flip-out Keyboard is Better Than the iTwinge . 

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#2) On October 08, 2010 at 7:30 PM, gnulaw (57.96) wrote:

>>...and more recently (last two weeks)...

 

8. (October 08, 2010) CNBC.com Six Cool Companies to Work For (Google, Ning, ThinkGeek...)

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#3) On October 11, 2010 at 7:31 PM, gnulaw (57.96) wrote:

>>The wildcard - Slashdot.org

Slashdot (@slashdot)
10/10/10 3:06 PM
New Tool Blocks Downloads From Malicious Sites http://bit.ly/bPcE0T

Brian Baskin (@bbaskin)
10/10/10 3:10 PM
RT @slashdot: New Tool Blocks Downloads From Malicious Sites http://bit.ly/bPcE0T < Once again, /. is about 8 months late on a story

Above two posts are © 2010 Twitter

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#4) On October 14, 2010 at 6:00 PM, gnulaw (57.96) wrote:

The 1:10 reverse split was voted on today. Whatever happens, a considerable amount of activity has transpired since Kenneth Langone's arrival arguably suggesting the current Geeknet (GKNT) recommendation should be "Don't bet against Geeknet (or Kenneth Langone)? 

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#5) On October 19, 2010 at 8:09 PM, gnulaw (57.96) wrote:

(October 14, 2010)  Ken Langone Discusses Wall Street, U.S. Economy: Audio

"...Ken Langone, chief executive officer at Geeknet Inc., co-founder of Home Depot Inc. and former New York Stock Exchange board member, talks with Bloomberg's Pimm Fox and David Wilson about the challenges of starting a business, Wall Street and his outlook for the U.S. economy..."

(Source: Bloomberg)

 

 

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#6) On October 29, 2010 at 5:31 AM, gnulaw (57.96) wrote:

(Oct 28, 2010) Business Insider 10 Unusual Stocks Attracting Huge Interest In The Pre-Market Right Now

"...Yes there is a company called Geeknet (GKNT), and its on the run right now...Not sure why yet, this tiny company reports on November 4th. Could just be someone building a position. 'An online network for the global geek community' Really. But watch this become huge and I'll eat my words..."  Geeknet hit a new 52 and 142 week high yesterday, 10/28. 

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#7) On October 29, 2010 at 5:59 PM, gnulaw (57.96) wrote:

(October 29. 2010) Geeknet (GKNT) hits new 52 and 142 week high 10/29 on 2.5x ADV (3 mo).

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#8) On November 09, 2010 at 8:38 PM, gnulaw (57.96) wrote:

(November 09, 2010) Motley Fool Throw This Stock Away (AMZN, DHX, GKNT, GOOG, INET, MCHX, TTGT)

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#9) On November 16, 2010 at 7:26 PM, gnulaw (57.96) wrote:

(November 16, 2010) Geeknet Launches Feedery: A Recommendation Engine That Tailors News to Individuals

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