[Update6] Geeknet Disrupt - Three Years ago a 13D Hedge Fund Put Pressure On the Geeknet (GKNT) Board Demanding to Unlock Value. Did GKNT Create Non-Insider shareholder value? Hint: No.
[Update5] Geeknet Disrupt - Approximately three years ago (35+ Months) 13D Hedge Fund Shareholder Put Pressure On Geeknet (GKNT) Board Demanding to Unlock Value. Where is Geeknet today?
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 ($50 and 150 post reverse-split). Source: Taking the Street.com [Note: This link is no longer good] Feb 18, 2008.
Where is Geeknet (GKNT) shareholder value 35+ 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 $1.69* Thursday (pre-split) , January 20th, 2011, where it closed down 7.99% on 3x ADV after closing down 7.58% on 2x ADV the day before. In other words, Kenneth Langone's "Partners" have destroyed shareholder value by 11.8% over three years** (by Market Cap after a 11.41% share buyback - one of Trivium's requests) thirty-five (35)+ 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:
* pre-1:10 reverse share-split
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 latest quarterly report: 6.24M. Source: Yahoo! Finance
Market cap 02/18/08: $120M Source: Ibid.
** Market cap 01/20/2011: $105.8M Shareholder Value Destruction: --> 11.8%
Shareholder Equity 02/18/08: $60M Source: Ibid.
Shareholder Equity 09/30/10: $41.2M Shareholder Value Destruction: -->31.3%
To put all this into perspective, the "Partners", including since Kenneth Langone's appearance, have failed to turn things around from a market capitalization, non-insider shareholder value perspective. Of significance, Geeknet shareholder value does not reflect the following events since Trivium's demand letter:
1. Linux.com (given away) and ohloh.net (asset sale within 16 months of acquiring) fiasco's led/endorsed by Geeknet management, Board of Directors, including Langone's friends e.g. Suzanne Present, Marlin Sams Fund LP. Note: Scott Collison resigned on June 16th (2010) before returning after Scott Kauffman announced his resignation.
2. Geek.com acquisition and unreported divestiture.
3. Unique visitors to Geeknet owned sites (Thinkgeek.com , Slashdot.org, Geek.com, Sourceforge.net, freshmeat.net) grew appx. eighty-one (81%) percent from 32 million unique visitors from 1/31/2008* to 57.9M as of November 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.
** (November 2010 Unique Visitors 57.9M. Source: Google Analytics and Omniture). Source: Geeknet.
4. (Sep 22 2010) ThinkGeek TK-421 iPhone Keyboard covered by Gizmodo and Engadget (9/22). Update on TK-421.
5. (Sep 27, 2010) Inside ThinkGeek, Where Mythical Meat Can Make Millions W I R E D
6. (Sep 17, 2010) The Top 100 Web Brands (Geeknet #100).
7. (Sep 28 2010) "...Quality content is on the acquisitive menu again...", Motley Fool.
8. (October 2010) Kiplinger, 6 Rules for Investing in Internet Stocks and 8 Promising Picks
9. (October 14, 2010) Ken Langone Discusses Wall Street, U.S. Economy: Audio [00:41 / 28:35]
"...It turns out that he [Ken Langone] is a bit of a geek...he's a technologically savvy guy...he's running a company now called Geeknet...I remembered it as VA Linux...SourceForge...who knew? It's a matter of timing, getting on top of the trends...well certainly Ken Langone knows all about trends..." (Source: Bloomberg, Taking Stock)
10. (October 28, 2010) CNBC Squakbox, Langone's Economic Outlook, [ 15:13/16:43] "...I just took over a little company...my partners and I own a significant piece of the company...called Geeknet...". Q: Does Kenn
11. (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.
12. (October 29. 2010) Geeknet (GKNT) hits new 52 and 142 week high 10/29 on 2.5x ADV (3 mo).
13. (November 09, 2010) Motley Fool Throw This Stock Away (AMZN, DHX, GKNT, GOOG, INET, MCHX, TTGT)
14. (December 13, 2010) CNBC-Goldman Doesn't Need to Make Apologies: Langone [video]
The wildcard - Slashdot.org (aka Feedery.com?) -->
(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.
Update: Given what has transpired the past 140 days (roughly Sep 1 2010 - Jan 20 2011) the real wildcard is Kenneth Langone.
Reference: (February 21, 2008) Trivium Capital Management Sends SourceForge a 13D Valentine.
(1) LETTER TO BOARD OF DIRECTORS
February 14, 2008
Robert Neumeister, Jr.
Scott E. Howe
David B. Wright
The Board of Directors at SourceForge (nka Geeknet)
650 Castro Street
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.
Trivium Capital Management