eSpeed, Inc. (NDAQ:ESPD) shares moved higher yesterday after Chapman Capital disclosed a 9.3% stake and demanded that the company put itself up for sale in a Schedule 13D filing with the SEC. Problems began in early 2004 when the hedge fund begun to recognize a significant divergence between the performance of the company's common stock and its publicly traded peers. Specifically, in 2004 the company stock plummeted 47% while that of its peers remained flat, and in 2005 the company's stock dropped 37% while its peers added 49%. Then in January of 2006 there was a glimmer of hope when The Daily Telegraph reported that Cantor Fitzgerald was preparing a stock market float of BGC Partners, its London-based brokerage business, in a move that was expected to lead to a merger with eSpeed, the Nasdaq-quoted broker also controlled by Cantor, to create a company worth between $500 million and $1 billion. However, this deal never materialized. Then, in a highly questionable December 2006 Form 4 filing with the SEC, Mr. Lutnick was granted, free of cost, 800,000 Class A common stock options - representing 3% of the company's outstanding shares! This upset many investors who feared the potential dilutive effects of the options. Finally, the last straw came in February of this year when the company issued a press release that disclosed its FY2007 financial outlook. Investors were outraged to find out that company projected nearly break-even operating performance due to approximately $152 million of non-GAAP operating revenues being consumed by $146 to $148 million of non-GAAP operating expenses, a level of spending which Chapman Capital and other investors have thought unacceptable.

So, Chapman finally voiced his opinions during the company's February 14, 2007 conference call to discuss 4Q2006 earnings. Mr. Chapman commented, "Why not actually take the initiative, retain an investment bank, and actually try to find someone who can deliver immediate value to the owners? And it doesn't have to be a cash transaction. It can be a stock swap. If the transaction is as accretive as you might fear it to be for the buyer, i.e., that you think you might be selling the Company too cheaply, in theory, and it typically has worked out this way in the past, the acquirer shares that we'll be receiving as eSpeed holders will appreciate and make up for any discount you think we may have gotten in the transaction. Because being open minded and understanding a couple of cents per quarter in cost for growth is one thing. But the other side of the page is the opportunity cost. Had you years ago, with the benefit of hindsight, obviously, been able to see what could happen with the stock, with ICAP and some of the other competitive initiatives that have hurt the Company, we could be sitting on a $15, $20, $30 value now in another currency instead of eSpeed. So I would encourage you to be more than open minded. I think being much more proactive in this will be to the benefit of the owners. We want to stay constructive as owners of this Company. But the ownership base, seeing us on the 13F filings has been calling us and asking us to get much more aggressive in pursuing the Company to sell itself, and I hope that you'll see the light before we feel the need to do so."

Chapman Capital began contacting the company's peers to (1) broaden the understanding of the company's business, assets, liabilities, and competitive positioning, and (2) inform the company's peers of their interest in selling the company. The hedge fund also began contacting various past and present owners of the company in order to survey their views of the company. They found that the ownership base conveyed a nearly uniform desire for the company's value to be maximized through a change-of-control transaction. The problem is that approximately 88% of the company's voting power is controlled by Mr. Lutnick and his affiliates, despite owning a minority of the company's common stock. This is accomplished through the issuing of Class B shares, which have a higher voting power (10 votes each). Consequently, Chapman Capital demanded that the board of directors convert all Class B shares to Class A common stock. In the end, the hedge fund said that given Mr. Lutnick's failure to perform in his capacity as CEO, the company's long-term shareholder value should be maximized via a full scale auction of the company that is not limited to BGC as the sole negotiating counterparty. If this takes places, shareholders could see significant upside from these levels. This makes ESPD a stock worth watching!

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