Pivot Technology’s proposed takeover by founder’s group draws lots of flak

When you mix an inside bid with complexity there’s a reasonable chance the deal benefits one party in the cost of others.

When, within the same proposed transaction, you get change of control using a “business combination” but no exchange of money, then more alarm bells go off.

That’s the state of affairs at San-Diego based, TSC-Venture listed Pivot Technology Solutions, Inc. that has found a clever method to award control to a group of investors that also include two of the company’s founders.

That three-person group owns about 30 million shares – or about 18 per cent of the company that generates about $1.5 billion in annual revenue but whose market cap is less than $100 million.

Under the proposed deal – that has been because of the green light by the board and that is backed by a fairness opinion but still requires a shareholder vote – the founders will wholly own the successor corporation. In this way the founders group stands to obtain all the upside.

But everyone else, including John Sculley (Pivot’s chairman and the former leader at Apple and Pepsi), will give up their common shares and receive preferred shares. (Those prefs are valued at $10. It takes 14.286 common shares to get one pref share, meaning each share is deemed to become worth 70 ) Plans demand the distributions on the prefs to be boosted by a factor of three (compared to what’s paid around the common) although the same distributions may also “be deferred.”

Reaction to the transaction continues to be negative.

Torrent Capital, Inc.: The investor “vehemently opposes” the proposed arrangement. “In short, Torrent believes Pivot’s founders are attempting to wrestle control of the organization for no monetary consideration towards the shareholders.”

Torrent added it met with Pivot’s management per week before the announcement to find methods to enhance shareholder value and the proposed transaction “is wildly inconsistent with any plan of action we’d have deemed appropriate in order to achieve this.”

Torrent noted the proposal – that was made a couple of months after portfolio manager Jason Donvillle of Donville Kent Asset Management known rumours that Pivot, because of its low multiple, would be taken out either by management or “some private equity guys” – is helpful to the founders. “They would effectively manage the organization without putting forth any hard dollars to do so. What remains questionable is how the Transaction is helpful to Pivot’s real owners, the most popular shareholders.”

Cantor Fitzgerald: In a note, the firm’s analyst Ralph Garcea said the offer “undervalues,” Pivot. “As such,” said Garcea, the only analyst who covers Pivot, “we would look for a strategic buyer or private equity finance to part of and provide a superior proposal.” For the reason that note Garcea maintained his buy rating and also the $1.50 share target price.

And he reiterated his call for a bidding. “Pivot would benefit from an auction tactic to maximize shareholder value.”

Jeff Kinnear: Another investor with a similar view to Garcea, arguing, “a strategic buyer can afford to pay for a lot more than the present insider bid.”

The market: In the couple of days since the transaction was announced Pivot’s shares have remained inside a trading selection of low to mid $0.50s. That lack of movement suggests the marketplace has little faith the proposal will win your day.

bcritchley@nationalpost.com