SourceForge, Inc.
(NDAQ:LNUX) is starting to feel the pressure from a large institutional
shareholder calling for the web services company to unlock value
through a share buyback. Trivium Capital Management, which owns a 10.1
percent stake, recommended on many conference calls and discussed with
management the possibility and importance of a stock buyback. Many
investors are grateful for the intervention as they have had similar
concerns about the company’s overcapitalization and fear that it may
make acquisitions that could hurt it going forward.
The activist hedge fund argues that SourceForge has gone through
many transformative changes during the past year, but the overall
business plan has been mediocre at best. This has resulted in a modest
enterprise value of $60mm with a total market capitalization of $120mm,
leaving the equity value of the business at $60mm. Clearly, this is
unacceptable in terms of the valuation metrics that Wall Street is
ascribing to the business prospects of the firm. The board has a
fiduciary responsibility to shareholders to close this valuation gap
and enhance shareholder value.
Trivium suggested that a share buyback may be the best option as it
could result in a stock price between $5 and $15 per share. A share
buyback is also seen as necessary given that its 2008 to 2010 earnings
are seen to be highly accretive to EPS; the company has excess cash
that stands at about 50 percent of equity value; it would send a
message to investors and employees that the company believes in itself;
and it might increase the share price which would benefit shareholders.
For these reasons, the activist hedge fund recommends that the company
pursue an initial 10 million share buyback and consider selling
Collabnet in order to fund additional buybacks.
In the end, Trivium understands that economic times are difficult
and SourceForge is in a transitional phase, but still insists that they
should look to unlock value rather than pursue acquisitions. Moreover,
if the company is unable to execute in 2008 and 2009, the hedge fund
believes that management should pursue strategic alternatives, which
could include a sale of the company. Combined, these factors make LNUX
a stock worth watching closely over the next few months!
Related Companies
Amazon.com, Inc. (AMZN)
Borland Software Corporation (BORL)
Microsoft Corporation (MSFT)
eBay Inc. (EBAY)
PC Mall, Inc. (MALL)
Zones, Inc. (ZONS)
IAC/InterActiveCorp (IACI)
George Foreman Enterprises, Inc. (GFME)
Alloy, Inc. (ALOY)
GenesisIntermedia, Inc. (GENI)