Hypercom Corporation (NYSE:HYC) shares rose $0.33, or 6.4%, to $5.49 today after RLR Capital Partners and their affiliates disclosed a 5.1% stake in the company and expressed concerns about management's new strategy discussed in their March 7th conference call in which the company said they planned to use their excess cash in order to grow the company's terminal services business through acquisitions. The hedge fund believes that this strategy is the wrong use for the company's excess cash and instead believes that the company should use the cash to repurchase their own shares. Why? It's simple: The company's shares are trading at only 4.5x EBITDA, making its own shares the best value in the terminal services industry! RLR encouraged the company to repurchase a third of their outstanding shares using a combination of cash and short-term investments along with the after-tax proceeds of their sale of a building and land in Phoenix which could be immediately accessed by borrowing against the real estate. With this $86 million, the company could afford to repurchase approximately 18 million of the 53 million outstanding shares.

RLR also expressed concerns about the company's low margins compared to its peers; why is the company focusing on an acquisition strategy when its core businesses are still lagging behind the competition? Hypercom's margins are expected to approach 10% this year compared to competitors VeriFone and Lipman Electronics, who have seen 20% margins. Based RLR's projected 2008 revenue for Hypercom of at least $340 million, each incremental 100 basis points of margin improvement yields approximately $0.10 of incremental EBITDA per share, giving effect for the reduced share count from the buyback described in their plan above. Using a range of EBITDA multiples of 8 to 12 times (compiled from industry averages), each incremental $0.10 of EBITDA per share is worth $0.80 to $1.20 per share in valuation, which is quite significant given the company's current share price. So, if Hypercom can achieve margins similar to those of Lipman when it was acquired (i.e., 20% in 2008 vs. projected 10% in 2007), then the incremental 1000 basis points of margin improvement would yield an additional $1.00 per share of EBITDA, which would be worth $8.00 to $12.00 per share, or $280 to $420 million in total. These numbers represent a 45% to 118% premium to the current market price - certainly something worth considering!

Finally, RLR suggested that if the company found itself incapable of making improvements to its core businesses, it should consider exploring strategic alternatives, including a possible sale of the company. There is a history of successful acquisitions in Hypercom's industry and it is simple to see why a sale would make sense. In April of last year VeriFone (the #2 player in the industry) acquired Lipman Electronics (the #3 player in the industry) for $793 million in a deal that created a new #1 player in the industry. Lipman was acquired for 12x current year EBITDA and 10x forward year EBITDA in this transaction. Based on the these multiples, and using the lower Hypercom share count of 35 million, the company would have a value of $420 to $450 million, or approximately $12 to $13 per share in the event of a buyout. Certainly this is another option for shareholders that is worth noting!

Clearly, RJR has brought up some excellent alternatives to the acquisition strategy discussed by management. In the end, any acquisition strategy would be hard pressed to match the shareholder value potential seen in these estimates. Moreover, there is always a great amount of risk associated with any acquisition strategy. If the company expresses interest in utilizing RJR's plans or working with them to unlock shareholder value, it could mean significant upside from these levels. You can read their entire letter to the company's board and management by reading through their Schedule 13D filing with the SEC. However, this situation clearly makes HYC a stock worth following!

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