NetManage, Inc. (NDAQ:NETM) shares moved up $0.08, or 1.53%, to $5.32 after Riley Investment Management LLC expressed concerns with the company's operating and financial condition and recommended that the it immediately review a standing offer to acquire the company at $5.25 per share. The 6% shareholder believes that the company should no longer operate as a stand-alone public company, given their expensive public compliance costs relative its size and its operating performance over the last several years. Just how bad is it? Well, over the last 10 fiscal years NetManage’s revenues have shrunk by approximately 66% while net losses amounted to approximately $176 million. This caused the company’s stock to lose about 33% of its value throughout the last five years while the NASDAQ added 28%. Even more troubling was the fact that executive compensation rose 14% during this period, while the CEO received 486,393 options, or enough to cover around 5% of the shares during that period!

Riley Investment Management summarized the situation best in their letter attached to their Schedule 13D/A filing with the SEC:

We wish to conclude by reminding directors of their duty to maximize and realize shareholder value. All of NetManage’s directors, aside from one, have served on the board for more than 9 years and some have held seats for over 15 years. This group of directors oversaw the strategy that led to NetManage’s disappointing performance and endorsed management’s decisions during the deterioration of the last decade.  Furthermore, none of the directors aside from the CEO are major shareholders of NetManage. We therefore call on the board to change course and acknowledge that NetManage’s operational plan is not working for the benefit of its owners. We believe that the board of directors should move swiftly towards realizing the value that still exists in NetManage’s legacy customer base and recurring revenue sources, through a sale of the Company to a strategic or financial buyer. With an installed base of more than 10,000 customers, NetManage presents potential buyers with a strong stream of maintenance revenues that command an estimated gross margin in excess of 90%. Leveraging this customer base can offer strategic buyers a solid platform on which to grow additional products while utilizing a larger sales force and spreading the cost of research and development over an expanded revenue base. Alternatively, NetManage’s highly profitable recurring cash flows can offer financial and private buyers excellent returns as they eliminate the unnecessary costs of public filing, as well as what we view as excessive management compensation and under-scaled general and administration expenses currently incurred by NetManage.

Clearly, there is a strong argument for the company to put itself up for sale. A strategic buyer would be able to realize far more value than is currently reflected in the current share price. This makes NETM a stock worth keeping an eye on over the next few months!

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