NORWALK, Conn., July 19, 2017 /PRNewswire/ -- Dialectic Capital
Management, LLC, one of the largest shareholders of Covisint
Corporation ("Covisint" or the "Company") (NASDAQ: COVS), with
beneficial ownership of approximately 7.7% of the Company's
outstanding shares, today issued a public letter to Covisint
shareholders announcing its intention to vote AGAINST the proposed
acquisition of Covisint by Open Text Corporation at the Company's
upcoming special meeting of shareholders to be held on July 25, 2017. The full text of the letter is
included below.
July 19, 2017
Dear Fellow Covisint Shareholders:
Dialectic Capital Management, LLC (together with its affiliates,
"we") is one of the largest shareholders of Covisint Corporation
("Covisint" or the "Company"), with ownership of approximately 7.7%
of the Company's outstanding shares. As one of the Company's
largest shareholders, we feel obligated to state our intention to
vote AGAINST the proposed acquisition of Covisint by Open Text
Corporation ("OpenText") at the Company's upcoming special meeting
of shareholders to be held on July 25,
2017. Following years of mismanagement under the leadership
of the board of directors (the "Board") and management team
resulting in a depressed valuation, we believe it is wholly
irresponsible for the Company to be sold now after posting its
first quarter of profits.
Plain and simple, we believe the $2.45 per share price that is being offered to
Covisint shareholders is completely inadequate. The current offer
is seemingly representative of a company in secular decline with no
growth opportunities, low margins and no proprietary technology –
none of which is the case with Covisint. Even using the
"cherry-picked" multiples the Company's own financial advisor,
Evercore Group L.L.C. ("Evercore"), used in the Company's proxy
statement for comparison, the multiple of Covisint's acquisition
looks out of place:
Company
Name
|
Total Enterprise
Value to 2017 Estimated Revenue
|
Brightcove
Inc.
|
1.26x
|
eGain
Corporation
|
1.04x
|
Guidance Software,
Inc.
|
1.91x
|
Jive Software,
Inc. (Acquired on 6/13/17)
|
1.46x
|
Marin Software
Incorporated
|
0.20x
|
|
|
Mean
|
1.17x
|
Median
|
1.26x
|
|
|
Covisint
|
1.00x
|
Based on Evercore's own analysis, it appears that Covisint was
practically given away. In its analysis, Evercore determined that
the median enterprise value/revenue multiple for public comparable
companies was 1.25x and 1.7x for recent similar transactions. Given
Covisint's enterprise value is approximately $69.7 million and management's estimated 2017
revenue of $70 million, the current
offer of $2.45 represents an
enterprise value to revenue multiple of approximately 1x. Using the
median multiples of 1.25x and 1.7x calculated by Evercore generates
per share prices of $2.88 and
$3.65, representing premiums of 18%
and 49%, respectively, to the current offer of $2.45.
In addition to our concern with the enterprise value/revenue
multiple for the proposed transaction, we are troubled by the
discounted cash flow analysis generated by Evercore based on
management's long term projections. The assumptions in the analysis
seem illogical and manufactured to yield the desired outcome of a
sale. Even in the "Sensitized Projections," where the business is
run to maximize cash flow, revenues show slight growth, but
Evercore assumes a negative perpetual growth rate. We are unable to
reconcile any of management's projections with the assumptions used
to derive the multiples for the sale price. The current multiple
also represents just over 1x recurring revenue, which is
unjustifiably low in our view as it is difficult to find any
software companies that have sold with that low of a multiple.
We believe Covisint participates in one of the most exciting
areas of tech, and if it is able to execute on any of management's
internal projections, the justified EV/EBITDA multiple would
be well above 10x. If the Company does roughly $20 million of EBITDA and is able to generate
some revenue growth, as detailed in the "Sensitized Projections,"
then applying a 10x EV/EBITDA multiple results in a stock price of
$5. Even discounted back to present
value, this results in a per share value well above the current
offer. If revenue growth is in line with the "Base Case
Projections" (i.e. much higher), then we believe an even higher
multiple would be justified. How can the Board recommend an offer
representing an EV/EBITDA multiple of roughly 3.5x?
Further supporting our decision to vote against the proposed
acquisition by OpenText is OpenText's own guidance to the street
following the announcement of the deal. OpenText indicated that the
acquisition of Covisint would be 2% accretive in the upcoming
fiscal year ending June 2018. This
implies around $13 million of
acquired net income for which it is paying $70 million. Notwithstanding our beliefs that the
implied income is conservative and there are obvious synergies
through which it could be further improved, to be able to acquire a
viable tech business for roughly five times net income is absurd.
We believe OpenText is getting a sweetheart deal that significantly
undervalues Covisint shares.
The real tragedy is that after rejecting an offer in the range
of $3.00 to $3.75 per share bid last
spring and subsequently resisting efforts by shareholders to
improve the Company, the Board elected to accept a 27% lower bid at
the same time the Company posted a profitable quarter. This
decision-making process calls into question the fitness of the
members of the Board to continue to serve as fiduciaries of the
Company's shareholders.
Under the right leadership, we believe there is a viable path
forward for the Company that is more attractive than the current
offer. If the Company were to focus its sales efforts on the auto
end market with an emphasis on existing customers, adjust its cost
structure to be run profitably and look to grow responsibly either
through small acquisitions or internal development, we believe the
Company could be sold in the future for a much higher price. More
specifically, we believe that using a business plan similar to the
Company's "Sensitized Projections," the Company could generate
meaningful cash flows in short order. Profitable businesses attract
both talented employees and customers. The cash generated could be
used to examine and potentially acquire small companies within the
growing internet of things, supply chain management and automotive
software spaces. Moreover, the Company's NOL of around $20 million would shelter early profits.
Once the Company has proven its ability to generate a
sustainable profit, if it is unable to find a reasonable growth
opportunity, then it should go through a similar sales process to
try and maximize shareholder value. We do not believe that a sale
now at the proposed price is advisable as we believe it
significantly undervalues the Company's prospects.
To protect the value of our investment and preserve the
flexibility to effect a leadership change at the Company, we intend
to vote AGAINST the proposed acquisition of Covisint by OpenText.
Had it not been for the standstill provisions contained in our
prior agreement with the Company, we would have stated our
opposition to the proposed transaction long ago. With the
standstill now behind us, we are free to take any and all action
that we believe is necessary to protect the value of our investment
– something we fully intend to do.
Sincerely,
John Fichthorn
Dialectic Capital Management, LLC
Contact:
John Fichthorn, (212) 230-3230
PLEASE NOTE: Dialectic Capital Management, LLC is not
asking for your proxy card and cannot accept your proxy card.
Please DO NOT send us your proxy card.
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SOURCE Dialectic Capital Management, LLC