Archive for April, 2009

Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) has reported its results for the first quarter ended March 31, 2009.

We’ve been following VNDA (see our post archive here) because it’s trading below its net cash value and Tang Capital Partners (TCP) has called for the company to “cease operations immediately, liquidate [VNDA]’s assets and distribute all remaining capital to the Stockholders.” TCP has now filed a preliminary proxy statement for the 2009 Annual Meeting urging stockholders to support TCP’s slate of two director nominees, Kevin C. Tang and Andrew D. Levin, M.D., Ph.D. The stock is up 29.5% since we initiated the position to close yesterday at $1.01, giving the company a market capitalization of $24.3M. We initially estimated the net cash value to be around $42.6M or $1.60 per share. We’ve now reduced our estimate of the net cash value to $38.6M or $1.45 per share. The company continues to hemorrhage cash, so the investment turns on TCP’s ability to get control of the board at the Annual Meeting and staunch the bleeding. If TCP cannot get onto the board quickly, the company will continue to burn cash and the investment will be a dud. VNDA has a staggered board, which makes TCP’s task difficult.

The value proposition updated

In the first quarter of 2009 VNDA burned through $3.8M in cash, which reduces our estimate of the net cash value from $42.6M to $38.6M or $1.45 per share (the remaining difference is due to the slight increase in shares on issue). Set out below is our summary balance sheet  (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):



VNDA continues to be an interesting play. While the stock is up nearly 30% since we initiated the position, it is still trading at a 45% discount to our estimate of its $1.45 per share net cash value. That value is of course deteriorating rapidly, and the challenge for investors is to determine which of two outcomes is more likely: If TCP can get on the board quickly, stop the cash burn and liquidate the company, we’re likely to see a good return. If TCP cannot get onto the board quickly or at all, the company will continue to burn cash and the investment will be a dud. VNDA has a staggered board, so this will make TCP’s task difficult. We’re inclined to maintain our position and see how this plays out.

[Full Disclosure:  We do not have a holding in VNDA. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]


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Genaera Corporation (NASDAQ:GENR) is a first for us: a short play. The company has announced that the board of directors has approved a Plan of Liquidation and Dissolution forecasting distributions of between $0.002 and $0.0173 per share contingent on a sale of its assets. We believe the most likely outcome to be a distribution of nil. The stock is currently at $0.18. The risk to the short position is a sale of the company’s intellectual property, which we think is unlikely for the reasons we describe below.

About GENR

GENR is a biopharmaceutical company focused on advancing the science and treatment of metabolic diseases. It has announced a plan to liquidate:

Genaera Corporation Announces Approval of Plan of Liquidation and Dissolution by Board of Directors

Plymouth Meeting, PA – April 28, 2009 – Genaera Corporation (the “Company”)(NASDAQ: GENR) today announced that its Board of Directors has determined, after extensive and careful consideration of the Company’s strategic alternatives, that it is in the best interests of the Company and its stockholders to liquidate the Company’s assets and to dissolve the Company. The Company’s Board of Directors has approved a Plan of Complete Liquidation and Dissolution of the Company (the “Plan of Dissolution”), subject to stockholder approval. The Company intends to hold a special meeting of stockholders to seek approval of the Plan of Dissolution and has filed preliminary proxy materials with the Securities and Exchange Commission (“SEC”) and will file definitive proxy materials in the near future.

The Plan of Dissolution contemplates an orderly wind down of the Company’s business and operations. If the Company’s stockholders approve the Plan of Dissolution, the Company intends to file articles of dissolution, satisfy or resolve its remaining liabilities and obligations, including but not limited to contingent liabilities and claims, lease obligations, severance for terminated employees and costs associated with the liquidation and dissolution, and attempt to convert all of its remaining assets into cash or cash equivalents. Based on current projections of operating expenses and liquidation costs the Company currently estimates that it will not make liquidating distributions to stockholders unless and until a sale of one or all of its assets has been consummated. Following stockholder approval of the Plan of Dissolution and the filing of articles of dissolution, the Company would delist its common stock from NASDAQ.

If, prior to its dissolution, the Company receives an offer for a corporate transaction that will, in the view of the Board of Directors, provide superior value to stockholders than the value of the estimated distributions under the Plan of Dissolution, taking into account all factors that could affect valuation, including timing and certainty of closing, credit market risks, proposed terms and other factors, the Plan of Dissolution could be abandoned in favor of such a transaction.

The value proposition

GENR has funded its operations primarily from the proceeds of public and private placements of its securities and through contract and grant revenues, research and development expense reimbursements, the sale of a Pennsylvania research and development tax credit carry forwards and interest income. It has not nor will it ever have products available for sale and has incurred losses since inception.

The notice of special meeting filed yesterday anticipates a maximum distribution of $0.0173 per share and the company does not expect to make a distribution “unless and until a sale of one or all of our assets has been consummated.” The balance sheet as at March 31, 2009 shows $5.3M in cash and equivalents less $2M in liabilities, which equates to a net cash value of $3.3M or $0.19 per share before we deduct the following:

  • ongoing operating expenses;
  • expenses incurred in connection with extending directors’and officers’ insurance coverage;
  • expenses incurred in connection with the liquidation and dissolution process;
  • severance and related costs; and
  • professional, legal, consulting and accounting fees.

Assuming between $3M and $4M for the foregoing, GENR has between $0.02 per share and nil net cash value in liquidation, with nil being more likely.

The company’s own estimates are as follows:

Based on our current projections of operating expenses and liquidation costs, we currently estimate that distributions to stockholders would only occur in the event of a consummation of the sale of one or more of our assets:


(1) Estimated salaries and related benefits for employees through May 31, 2009.
(2) Represents final research and development expenses related to the wind down of our trodusquemine program, including clinical trial costs, third-party contract research costs and manufacturing expenses.
(3) Other operating expenses consists of facilities expenses, legal, accounting and intellectual property expenses, consulting and other fees and insurance costs including the payment of $255,000 for directors and officers liability insurance covering six years from the date of stockholder approval of the Plan of Dissolution.
(4) Estimated cash use for severance payments to employees remaining after March 31, 2009, including Executive Officers. Amounts included in the table for Executive Officers do not include amounts due under the Executive Officers and Dr. Wolfe’s change of control agreements. See “Interests of Certain Directors and Executive Officers in Approval of the Plan of Dissolution – Summary of Benefits of Certain Executive Officers” for additional information related to severance payments to the Executive Officers. The severance costs shown in the table include $1,012,000 to be paid to the Executive Officers, $516,000 to be paid to other employees, $95,000 of associated payroll taxes and $42,000 for ongoing health benefits under employee severance agreements for all employees.

The risk to this analysis is the company actually manages to sell its intellectual property assets, and we’re going to explore GENR’s efforts to sell those assets in some detail below.

Likelihood of asset sales

According to the proxy statement for the special meeting, GENR has made extensive efforts to sell or license its intellectual property without success since 2008. Throughout 2008 management contacted over 90 prospective strategic partners, both domestic and international. This resulted in approximately 25 companies signing non-disclosure agreements and receiving non-public evaluation materials. Subsequently, two parties submitted expressions of interest in the purchase of two separate assets.

GENR and its legal advisors have been engaged in discussions with one prospective purchaser in an attempt to reach an agreement regarding the acquisition price and the other terms of a definitive agreement. According to GENR, the parties are generally in agreement on the proposed terms of a definitive agreement and continue to communicate, but have been unable to complete the transaction. With regard to the second potential purchaser, GENR is currently engaged in discussions in an attempt to reach an agreement regarding the acquisition price of the other asset.

In 2009, as a result of limited interest in GENR’s other assets and the unanticipated delay in the consummation of the transaction, GENR engaged of outside parties to assist in licensing and/or partnering its trodusquemine program. The scope of the oustide engagement included searching for a purchaser, licensee or partner acceptable to GENR and assisting it in negotiating the financial aspects of a transaction.

Between January and March 2009, the oustide parties contacted 43 potential purchasers and/or partners, which resulted in 23 rejections, 9 pending reviews and the execution of 11 non-disclosure agreements to review non-public evaluation materials. The review of confidential information resulted in six rejections and meaningful discussions with three potential licensors and/or purchasers.

At the April 8, 2009 meeting of the board, the board reviewed the prospects for partnering and/or licensing the trodusquemine program, the status of the sales of two of its assets, as well as alternative means to fund the company. As neither of the asset sales had been consummated or were projected to be consummated imminently, the board instructed management to prepare a plan of dissolution in conjunction with the outside counsel for review and consideration at the next board meeting.


GENR is a short play because the current stock price is almost ten times the company’s projected distribution in the liquidation of the company. The stock is currently at $0.18. The company forecasts distributions of between $0.002 and $0.0173 per share contingent on a sale of its assets. We believe there is a very real possibility the distribution could be nil.  The risk to the short position is a sale of the company’s intellectual property, which we think is unlikely.

Hat tip Anon.

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In Now a baker’s dozen in North Dakota, footnoted.org’s Michelle Leder tracks the small, but growing number of companies whose shareholders are requesting via the annual proxy process that their companies relocate to North Dakota:

Last week, 11 companies, including Exxon Mobil (EOM), Southwest (LUV), and Amgen (AMGN), were on the list. But since Friday, two more companies have been targeted, which makes it a baker’s dozen. Over the past two days, shareholder activist John Chevedden, who has introduced proposals at Southwest and two others, added Continental Airlines (CAL) and Staples (SPLS) to his list.

The rush is on because the corporations law in North Dakota is intended to be much friendlier to shareholders. Shareholders in North Dakota can expect the following (from the 2007 press release announcing the bill):

· Majority voting in election of directors. In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.

· Advisory shareholder votes on compensation reports. The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.

· Proxy access. The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.

· Reimbursement for successful proxy contests. The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.

· Separation of roles of Chair and CEO. The board of directors must have a chair who is not an executive officer of the corporation.

As we’ve discussed previously, Carl Icahn is a supporter of North Dakota’s initiative, and has even proposed a federal law that allows shareholders to vote by simple majority to migrate a company from its state of incorporation to more shareholder-friendly states, including North Dakota. At present, that power is vested in boards, which means that even if the proposal passes, the boards must embrace the proposal before it is binding on the company. Leder thinks this means it’s unlikely that the companies will up stakes for North Dakota, but it’s interesting to watch.

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Autobytel Inc’s (NASDAQ:ABTL) board has responded to Trilogy, Inc’s $0.35 per share tender offer, calling it “grossly inadequate” and “unequivocally” recommending that stockholders reject it.

We started following ABTL (see our post archive here) because it was trading at a substantial discount to its liquidation and net cash values and Trilogy had filed a 13D notice disclosing a 7.4% holding. Trilogy has now launched a tender offer for ABTL at $0.35 per share, which is at our estimate of ABTL’s $15.4M or $0.34 per share net cash value, but at a substantial discount to our estimate of ABTL’s $24.3M or $0.54 per share liquidation value. When Trilogy launched its offer, we wrote that we believed that $0.35 per share was only the opening salvo and a higher price was possible if the board terminated the rights plan poison pill. The stock closed yesterday at $0.515, which is a huge 47% premium to Trilogy’s offer price and suggests the market is also anticipating a higher offer. The stock is up 19.8% since we started following it in December.

Here’s the letter from ABTL:

April 27, 2009

Dear Stockholder:

On Monday, April 20, 2009, I received a letter from Trilogy Enterprises, Inc. (“Trilogy”) indicating that Trilogy had launched a tender offer for all of Autobytel Inc.’s (our “Company”) outstanding shares of common stock at $0.35 per share.

Our Board of Directors (our “Board”), in consultation with its legal and financial advisors, has evaluated Trilogy’s offer and has found Trilogy’s $0.35 offer price to be grossly inadequate and unequivocally recommends to stockholders that they reject Trilogy’s offer and not tender their shares to Trilogy.

Our Board also believes that the combination of actions taken by our Company as described below will result in our stockholders achieving significantly more value than the offer made by Trilogy. In reaching its decision to recommend that stockholders reject the Trilogy offer and not tender their shares to Trilogy, our Board considered many factors, including:

• Our Company’s strong balance sheet and current cash and receivables position, noting, in particular, that our Company’s cash position alone is substantially in excess of Trilogy’s offer.

• The initial reaction of the securities trading markets to Trilogy’s offer appears to support our Board’s decision that the offer price is inadequate.

• The recent thorough evaluation of strategic alternatives conducted by our Board, including the possible sale of our Company, which concluded that selling our Company in today’s environment was not in the best interest of maximizing value.

• The indications of interest received and offers from potential buyers for our Company as a result of the sale process.

• Inquiries made to our Company’s financial advisor by other interested parties in response to Trilogy’s offer.

• The reasons for the Board’s decision to terminate the sale process, including:

• The value of our Company’s websites; and

• The value of our Company’s intellectual property, particularly its patents, which resulted in a $20 million settlement with the Dealix Corporation in 2006 and most recently settlements with Edmunds.com, Internet Brands, InsWeb and Lead Point that will provide our Company with valuable content, images, shopping and interactive tools and data for our websites.

• Other strategic alternatives being evaluated by our Board and management team.

• The belief that Trilogy is being opportunist in exploiting a recent extreme price decline in our common stock and use of confidential information about our Company obtained by Trilogy under a non-disclosure agreement.

Based upon the above, our Board recommends that you reject Trilogy’s offer and not tender your shares of common stock for purchase by Trilogy.

In addition, we encourage you to read the enclosed Schedule 14D-9, which provides further details with regard to our Board’s recommendation and discusses the factors that our Board carefully considered and evaluated in making its decision to reject Trilogy’s offer.

If you have any questions, please do not hesitate to contact our information agent, MacKenzie Partners, Inc., at the following numbers: Toll-Free 1-800-322-2885 or at 1-212-929-5500 (collect) or by email at autobytel@mackenziepartners.com.

On Behalf of the Board of Directors,

Jeffrey H. Coats
President and Chief Executive Officer

At $0.515, ABTL has a market capitalization of $23.3M, which is approaching our estimate of its $0.54 per share liquidation value. We’re planning to maintain the position as we believe a higher bid is on the cards and Trilogy will know that it is unlikely to get sufficient acceptances at a discount to ABTL’s liquidation value.

[Full Disclosure:  We do not have a holding in ABTL. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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We’re getting on the Twitter train. Catch us here: http://twitter.com/Greenbackd

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Ikanos Communications Inc (NASDAQ:IKAN) has acquired the assets of the Broadband Access product line from Conexant Systems, Inc. (NASDAQ: CNXT) for $54M partially funded by a sale of $42M in common stock at $1.75 per share to Tallwood Venture Capital. Upon completion of the transaction, Tallwood Venture Capital will own approximately 45% of IKAN, which means that the possibility of any catalytic event occurring is now remote. While IKAN is still trading at a discount to our calculation of its liquidation and net cash values, without a catalyst our investment thesis is gone, so we’re exiting the position.

We opened the IKAN position at $1.14 and it closed Friday at $1.37, which means we’re up 20.2% on an absolute basis. The S&P500 Index was at 836.57 when we opened the position and closed yesterday at 866.23, which means we’re up 16.6% on a relative basis.

Post mortem

We started following IKAN (see our post archive here) because it was trading at a discount to its net cash and had retained a financial adviser to “assist it in exploring and evaluating strategic alternatives to maximize shareholder value.” IKAN disclosed in its September 10Q that it had retained investment bankers to advise the board about IKAN’s strategic options:

We recently decided to retain Barclays Capital (formerly Lehman Brothers) to provide financial advice regarding potential strategic options for the Company. Such options include, without limitation, financing transactions, acquisitions, strategic partnerships, corporate restructuring and other activities. There can be no assurance that the evaluation of our options will result in the identification, announcement or consummation of any transaction. If the Board of Directors does decide to authorize a transaction, that decision could cause significant volatility in the price of the Company’s outstanding common stock. Moreover, any transactions we do sign may not be acceptable to our stockholders. In addition, our investigation of strategic options may result in added costs, potential loss of customers and key employees as well as management’s distraction from ordinary-course business operations.

We said at the time that there seemed to be some appetite for acquisitions in this industry giving the example of IKAN’s competitor Centillium Communications Inc (NASDAQ: CTLM), which was acquired in October last year. We were hoping that IKAN was to be the vendor, but it seems the “strategic option” favored by IKAN and its investment bankers is to be the acquisition of Conexant’s Broadband Access product line. Here’s the press release:

Ikanos Communications Announces Plans to Acquire Conexant’s Broadband Access Product Line

Tallwood Venture Capital Invests $42 Million

Webcast and Conference Call Details Included for this Event and for

First Quarter 2009 Financial Results

FREMONT, Calif., April 22, 2009, Ikanos Communications, Inc. (NASDAQ: IKAN), a leading provider of broadband semiconductor and software products for the digital home, today announced the signing of a definitive agreement to purchase the Broadband Access product line from Conexant Systems, Inc. (NASDAQ: CNXT). The combined organization will have the expertise and resources required to satisfy the demand for powerful broadband network products around the world.

Under the terms of the agreement, which was unanimously approved by the boards of directors of both companies, Ikanos will purchase Conexant’s Broadband Access product line for $54 million in cash and the assumption of certain employee and facility related liabilities. In connection with this transaction, Tallwood Venture Capital, a leading investment firm focused on the semiconductor industry, has agreed to purchase 24 million shares of Ikanos common stock for $42 million, or $1.75 per share. Tallwood will also receive warrants to purchase an additional 7.8 million shares of common stock at $1.75 per share. The warrants will have a term of five years. Upon completion of the transactions, Tallwood Venture Capital will own approximately 45 percent of the outstanding shares of Ikanos (excluding the warrants). In addition, following the transaction, George Pavlov, general partner, and Dado Banatao, managing partner, will join Ikanos’ Board of Directors.

Ikanos’ purchase of Conexant’s Broadband Access product line is subject to customary closing conditions, including stockholder and regulatory approvals, and is expected to be completed in the third quarter of calendar year 2009.

Ikanos expects that the transaction will more than double the Company’s revenue, while providing significant leverage in its cost and spending structure. Ikanos also expects that the transaction will be accretive to its non-GAAP earnings per share within the first year after the close of the transaction.

“With the number of home networks doubling to more than 400 million by 2013 according to analysts, there’s a substantial opportunity for Ikanos to address the need for delivering bandwidth to and throughout the home,” said Michael Gulett, president and CEO of Ikanos. “We’ll use our strengthened leadership in broadband access as a platform on which to build new offerings that extend multi-play services seamlessly everywhere they are needed.”

Today, Ikanos and Conexant account for a cumulative 330 million broadband access ports shipped, bringing the power of the Internet to millions of people around the world. Conexant’s Broadband Access product line has traditionally been strong in North America and China while Ikanos has led in Japan, Korea and Europe. The combined company will be well positioned to address the global market for broadband semiconductors, and better serve customers in all geographies.

“Customers should not be concerned about product transitions. Once the acquisition is complete, the combined company will continue to make available and support the products acquired from Conexant along with the products of Ikanos,” added Gulett.

The combination of Ikanos and Conexant’s Broadband Access product line brings together the industry’s most comprehensive portfolio of broadband access products. Ikanos will build on its status as the VDSL market share leader, will add substantial ADSL market share, and will have a broad product portfolio that includes SHDSL, 802.11 b/g wireless networking, Ethernet switching, and passive optical networking (PON). In addition, the combined company will have both MIPS- and ARM-based processors that are powering broadband access networks around the world.

The combined company will also have the expertise to enable service providers and network equipment manufacturers to effectively build advanced networks, and deploy multi-play services including high-speed Internet, Internet protocol television (IPTV), voice-over Internet protocol (VoIP) and fixed-mobile convergence (FMC) offerings. The combined organization’s customers will include a vast array of industry leading network equipment manufacturers and service providers from around the world.

“The combined company brings together a talented team of employees that pioneered and set the standards for the broadband market,” said Craig Garen, senior vice president and general manager of Conexant’s Broadband Access business. “Going forward, we’ll continue to innovate and create new broadband access and home networking products that deliver enhanced value to the marketplace.”

Both Ikanos and Conexant have been strong, active proponents of industry standards, and are advancing the development of next-generation technologies like ITU-T G.hn for whole-home networking, retransmission and the dynamic spectrum management. The combined company will have a portfolio of intellectual property that will include well over 400 patents and applications.

“This transaction brings together a powerful combination of leading products, strong customer relationships, and deep technical expertise, all dedicated to the broadband market,” said George Pavlov, general partner at Tallwood Venture Capital. “The new company that emerges will be able to compete more effectively in existing and emerging markets, develop exciting new products, and provide greater value for its most important stakeholders – its customers, investors and employees.”

IKAN is still trading at a discount to both its net cash and liquidation valuations, so it’s difficult to exit when the possibility of additional upside is good. IKAN is still burning cash, so that value will deteriorate, and our investment thesis was based on some catalytic event occurring before the value was dissipated. Tallwood Venture Capital’s 45% holding (excluding the 7.8M warrants) means that Tallwood has control, which in turn means the chance of a catalytic event occurring that could realize that value is now low. For those reasons, we’re out.

Hat tip to JM.

[Full Disclosure:  We have a holding in IKAN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Portfolio has a profile on Bill Ackman by

On starting Gotham Partners:

Ackman entertained the notion that he and Berkowitz might be able to raise tens of millions of dollars for Gotham’s launch-and he managed to talk his way into meeting with many of the wealthy and powerful moguls that he’d set his sights on. He pitched real estate scion Tom Durst and proposed three investment ideas to demonstrate Gotham’s research capacity. Durst declined to invest with the firm but then, according to Ackman, put his own money to work in the companies that Ackman and Berkowitz had recommended. After each had big gains in a matter of months, Durst came back to them and agreed to put money into their fund.

Gotham didn’t come up with anything close to Ackman’s hoped-for sum, mustering only $3.1 million. But in 1993, he and Berkowitz went ahead and launched the fund anyway. In time, Gotham gathered in millions. The Ziff family came in early; legendary investors such as Jack Nash, Leon Levy, Michael Steinhardt, and Seth Klarman also put money in.

In 1994, Gotham bought shares in a real estate investment trust poised to take control of Rockefeller Center, effectively becoming the largest holder of the real estate complex. At the time, the New York commercial real estate market was in a devastating slump. Thrusting himself into a highly publicized takeover battle, Ackman scored huge returns on his investment when the REIT was bought. He was on the map.

On his Farmer Mac investment:

Over the next three years, his fund averaged returns of 40 percent annually after fees. Gotham hardly ever shorted or bet against companies. But one day in early 2002, Whitney Tilson, a friend of Ackman’s since their days at Harvard College, called him at home to recommend that he buy a stake in a company called Farmer Mac, the Fannie Mae of farm mortgages. Ackman printed the annual report and started reading it around 9 that night. Riveted, he continued past midnight. He called Tilson first thing the next morning, excited. Farmer Mac was indeed an opportunity, but Tilson had it wrong. Ackman didn’t want to buy the stock; he wanted to short it.

Gotham placed its bearish bets. Then Ackman confronted a problem-how to get his negative message out. He began by talking to a reporter at the New York Times but didn’t think the resulting story made the case strongly enough, so he set up a website for the express purpose of displaying a report he wrote, with disclosures that his fund was short Farmer Mac’s stock. Going public on a short is an invitation to be attacked by companies and investors.

Ackman relished the frenzy that ensued. He’s still proud of the report’s title, “Buying the Farm.” And he profited spectacularly from the results: By fall, Farmer Mac’s stock had collapsed.

The first confrontation with MBIA:

Fresh from the Farmer Mac success, Ackman launched an audacious assault on MBIA, a company at the center of both Wall Street and state and local finance across the country. This move would prove remarkably insightful once the financial crisis hit, but vindication would be years in coming. First, Ackman was forced to undergo a remarkable battle with the company and its regulators.

MBIA dominated a sleepy, safe, and wonderful business: insuring municipal bonds from default. Since muni bonds almost never defaulted, MBIA almost never had to pay off the insurance. But when Ackman surveyed the company’s filings, he realized that MBIA had, to a degree utterly unrecognized by Wall Street, shifted into the business of insuring a vast array of much more dangerous paper: collateralized-debt obligations, or CDOs, which were constructed by the big banks to combine the bonds of multiple companies.

Expecting MBIA to default, Gotham began buying credit-default swaps, a form of short-selling in the unregulated derivatives market. If other investors became worried that MBIA would default, Ackman could sell the credit-default swaps for a gain; if MBIA actually did default, he would make a king’s ransom.

MBIA got wind of Ackman’s research and asked to meet with him. On November 21, 2002, Gotham representatives sat down with top MBIA executives. As people who were there recall the meeting, Jay Brown, the CEO of MBIA, began by saying how long he had been in the insurance business. “No one has ever questioned my reputation or my company’s,” he said. “You are using an unregulated market to manipulate a regulated market,” referring to MBIA’s insurance business. “You’re a young guy. It’s early in your career. You want to think very hard before you release that report,” Brown said, pointing out that MBIA was the largest guarantor of municipal bonds in New York State and the country.

“Is there anything you disagree with or that’s factually inaccurate?” Ackman asked.

“This is not about the facts,” Brown replied. “Let’s put it this way: We have friends in high places.” (An MBIA spokesperson says that the purpose of the meeting was to learn Ackman’s intentions and to request an early copy of his report to be able to point out any inaccuracies.)

The tense encounter lasted less than a half-hour. As they walked out, Ackman’s analyst shook Brown’s hand. Ackman then held his hand out to the CEO. Brown looked at it, lifted his arm up, and said, “I don’t think so.”

The article is worth a look. See it quick before Portfolio goes the way of the Dodo.

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Empirical Finance Research Blog has a review of a new paper, Hedge Fund Activism, Corporate Governance, and Firm Performance, which finds that the “market reacts favorably to hedge fund activism, as the abnormal return upon announcement of potential activism is in the range of seven percent, with no return reversal during the subsequent year.” Further, the paper “provides important new evidence on the mechanisms and effects of informed shareholder monitoring.”

The authors seek to address the questions posed by “critics and regulators” about the benefits of hedge fund activism to shareholders and the claim that hedge fund activists “destroy value by distracting managers from long-term projects.” Specifically, the paper seeks to answer the following questions:

  • Which firms do activists target and how do those targets respond?
  • How does the market react to the announcement of activism?
  • Do activists succeed in implementing their objectives?
  • Are activists short-term in focus?

We’ve set out below brief answers to the questions posed in the paper:

Which firms do activists target and how do those targets respond?

Hedge fund activists tend to target companies that are typically “value” firms, with low market value relative to book value, although they are profitable with sound operating cash flows and return on assets. Payout at these companies before intervention is lower than that of a matched sample. Target companies also have more takeover defenses and pay their CEOs more than comparable companies. Relatively few targeted companies are large-cap firms, which is not surprising given the relatively high cost of amassing a meaningful stake in such a target. Targets exhibit significantly higher institutional ownership and trading liquidity. These characteristics make it easier for activists to acquire a significant stake quickly.

How does the market react to the announcement of activism?

We find that the market reacts favorably to activism, consistent with the view that it creates value. The filing of a Schedule 13D revealing an activist fund’s investment in a target firm results in large positive average abnormal returns, in the range of 7 to 8 percent, during the (-20,+20) announcement window. The increase in both price and abnormal trading volume of target shares begins one to ten days prior to filing. We find that the positive returns at announcement are not reversed over time, as there is no evidence of a negative abnormal drift during the one-year period subsequent to the announcement. We also document that the positive abnormal returns are only marginally lower for hedge funds that disclosed substantial ownership positions (through quarterly Form 13F filings) before they file a Schedule 13D, which is consistent with the view that the abnormal returns are due to new information about activism, not merely that about stock picking. Moreover, target prices decline upon the exit of a hedge fund only after it has been unsuccessful, which indicates that the information reflected in the positive announcement returns conveys the market’s expectation for the success of activism.

Activism that targets the sale of the company or changes in business strategy, such as refocusing and spinning-off non-core assets, is associated with the largest positive abnormal partial effects of 8.54 percent and 5.95 percent, respectively (the latter figure is lower than the overall sample average because most events target multiple issues). This evidence suggests that hedge funds are able to create value when they see large allocative inefficiencies. In contrast, we find that the market response to capital-structure related activism – including debt restructuring, recapitalization, dividends, and share repurchases – is positive, yet insignificant. We find a similar lack of statistically meaningful reaction for governance-related activism-including attempts to rescind take-over defenses, to oust CEOs, to enhance board independence, and to curtail CEO compensation. Hedge funds with a track record of successful activism generate higher returns, as do hedge funds that initiate activism with hostile tactics.

Do activists succeed in implementing their objectives?

The positive market reaction is also consistent with ex-post evidence of overall improved performance at target firms. On average, from the year before announcement to the year after, total payout increases by 0.3-0.5 percentage points (as a percentage of the market value of equity, relative to an all-sample mean of 2.2 percentage points), and book value leverage increases by 1.3-1.4 percentage points (relative to an all-sample mean of 33.5 percentage points). Both changes are consistent with a reduction of agency problems associated with free cash flow and subject managers to increased market discipline.

We also find improvement in return on assets and operating profit margins, but this takes longer to happen. The post-event year sees little change compared to the year prior to intervention. However, EBITDA/Assets (EBITDA/Sales) at target firms increase by 0.9-1.5 (4.7-5.8) percentage points by two years after intervention. Analyst expectations also suggest improved prospects at target firms after hedge fund intervention. During the months before Schedule 13D filings, analysts downgrade (future) targets more than they upgrade them whereas after intervention is announced analysts maintain neutral ratings. Given that successful activism often leads to attrition through sale of the target company, ex post performance analysis based on surviving firms may underestimate the positive effect of activism.

Are activists short-term in focus?

Hedge fund activists are not short-term in focus, as some critics have claimed. The median holding period for completed deals is about one year, calculated as running from the date a hedge fund files a Schedule 13D to the date when the fund no longer holds a significant stake in a target company. The calculation substantially understates the actual median holding period, because it necessarily excludes events where no exit information is available by March 2007. Analysis of portfolio turnover rates of the funds in our sample suggests holding periods of closer to twenty months.

Empirical Finance Research has some tips for implementing the “hedge fund activist alpha strategy” based on their experience watching real-world activists work their magic:

1. Focus on small companies

2. Watch for activists who are entering companies at the same time mutual funds are dumping (watch for 13-G’s filed concurrently with 13Ds). This way you can buy at cheap prices while the mutual funds are putting pressure on the stock. Eventually, the selling pressure is gone AND you have an activist there to make sure the ship is sailing straight ahead.

3. Call the company in question and assess how ‘open’ they are. Sometimes even the best activist campaign can’t beat an overly entrenched and crooked management.

4. Call the activist and get a feel for what they want to do with the company. In my experience, activist investors are usually class-act capitalists and may give you hints as to the direction they want to take a company.

5. Do your own due diligence and determine where the ‘hidden’ value is located. If you have an assessment of exactly what the activist is after, you may be able to determine how successful they will be in their attempts to unlock this value. Here is a quick example. If you determine the activist wants to unlock value when there is a discrepancy between the value of an asset on the books and the value of an asset in the real-world (i.e. a real estate holding), but you determine that selling the asset would be a nightmare (maybe you live down the street from the property) and/or involves abusive tax treatment that not many people understand, you may shy away from following the activist.

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In Ackman and Target Tangle in Ballot Brawl, The New York Times’ Dealbook has coverage of the “universal ballot” spat between William A. Ackman’s Pershing Square Capital and Target Corporation (NYSE:TGT).  A candidate on Pershing Square’s ticket, Ronald J. Gilson, who is a law professor at Stanford University and an expert in corporate governance, has proposed that TGT place all the nominees running for election to the board on a single ballot, the so-called “universal ballot.” Presently, shareholders in most proxy fights receive two proxy cards and can vote only for one slate of candidates. Gilson’s proposal would give TGT’s shareholders the chance to pick candidates from both management and Pershing Square’s proxies.

Dealbook reports that the shareholder advisory firm RickMetrics Group support the universal ballot proposal:

“Pershing appears to be astutely exploiting the current pro-(shareholder)-choice zeitgeist, and puts Target on its back foot,” RiskMetrics said in a research note issued Tuesday. “It will be challenging for Target, absent some sort of unwaivable legal impediment, to argue against Pershing’s proposal without coming across as anti-shareholder.”

Here is Gilson’s letter to the board:


Charles J. Meyers Professor
of Law and Business

April 21, 2009

Mr. Gregg Steinhafel
Chairman of the Board
Chief Executive Officer and President
Mr. Timothy R. Baer
Executive Vice President
Corporate Secretary and General Counsel
Target Corporation
1000 Nicollet Mall
Minneapolis, Minnesota 55403

Re: Proposal to Use a Universal Proxy at the2009 Annual Meeting of Shareholders

Dear Messrs. Steinhafel and Baer:

On March 17, 2009, Pershing Square Capital Management, L.P. publicly announced that its affiliates had delivered a Notice of Nomination to you proposing to nominate five individuals for election as directors of Target at the company’s 2009 Annual Meeting of Shareholders. I am one of those nominees.

Both Target and Pershing Square have a unique opportunity to make this election historic from a corporate governance perspective. As you may know, the press has reported that SEC chair Mary Schapiro has directed the Commission’s staff to draft proposals for rules governing shareholder proxy access by mid-May 2009. I expect those proposed rules will provide the opportunity for the use of a universal proxy card whereby shareholders can choose – on one proxy card – from among the candidates nominated both by the company and by shareholders. The benefit to shareholders, who may want to choose members from both slates, would be substantial.

I first wrote about the need to remove the barriers to non-control proxy contests some 19 years ago.1 The occasion then was to recommend a change in the bona fide nominee rule to allow a shareholder running a short slate to include the names of the company’s nominees on the shareholder’s proxy card. That recommendation was accepted by the SEC, as I recall at the urging of Mary Schapiro, who was then a Commissioner.

Target and Pershing Square now have the opportunity to proactively provide good corporate governance to the Target shareholders by making it convenient for them to make a choice in what, in the end, is their election. This is not a control contest. The qualifications of the candidates will be fully vetted by the time of the May 28th election, and Target shareholders are entirely capable of assessing the candidates and making a choice. There is simply no excuse to deny shareholders the benefit of the use of a universal proxy card. The alternative will make it procedurally more difficult for Target shareholders to exercise their franchise. This is a problem that we, together, have the power to solve.

I have received assurance from Pershing Square that they would support a universal proxy card for Target’s upcoming Annual Meeting. I now seek the same from you. In the alterative, I ask that you consider allowing the company’s nominees to be named on the Pershing Square Gold proxy card. In either instance, shareholders would have the benefit of being able to choose the best nominees for the job. Target now has the opportunity to hold an election that will be a credit to the company’s corporate governance. I urge you to carefully consider this proposal and do the right thing for Target shareholders.

Very truly yours,

/s/ Ronald J. Gilson

1 Ronald J. Gilson, Lilli A. Gordon & John Pound, How the Proxy Rules Discourage Constructive Engagement: Regulatory Barriers to Electing a Minority of Directors, 17 Journal of Corporate Law 29 (with L. Gordon & J. Pound) (1992).

Here is TGT’s response:


MINNEAPOLIS, April 21, 2009 – Target Corporation (NYSE:TGT) today commented on the letter from Pershing Square nominee, Professor Ronald J. Gilson, that Pershing Square filed with the Securities and Exchange Commission (“SEC”). In the letter, Professor Gilson references possible future SEC changes to the federal proxy rules and proposes the use of a universal proxy card by Target and Pershing Square. Pershing Square has initiated a proxy contest to elect its own nominees, including Professor Gilson, to Target’s Board of Directors.

The company said, “We believe Professor Gilson’s proposal, coming at this stage of the proxy contest, would cause delay and confusion. Shareholders have a clear choice between our independent nominees on our WHITE proxy card and Bill Ackman’s slate on Pershing Square’s gold proxy card. We note, as does Professor Gilson, that the SEC may be considering a proxy access proposal. Any such proposal should be allowed to proceed on an appropriate timetable allowing for careful review and consideration by the SEC of a number of issues, including whether proxy access should be available to an entity, like Pershing Square, which has initiated its own proxy contest. In the meantime, the current proxy rules provide a framework for the conduct of the proxy voting process that is perfectly adequate for resolving the issues that Pershing Square is raising.

“With Target’s Annual Meeting only five weeks away, we believe our shareholders clearly understand the choice between our independent directors and the Pershing Square slate. We will be mailing our proxy materials shortly and encourage our shareholders to use our WHITE proxy card to support the reelection of the directors nominated by our Board.”

Shareholders who have questions about voting or the matters to be voted upon at the Annual Meeting are encouraged to call MacKenzie Partners, Inc. at 800-322-2885 Toll-Free or Georgeson at 866-295-8105 Toll-Free. The company will hold the 2009 Annual Meeting of Shareholders on Thursday, May 28, 2009. Target will be distributing proxy materials to shareholders of record as of March 30, 2009.

And Pershing Square’s response:

Pershing Square Comments on
Target’s Objection to Universal Ballot Proposal

New York – Pershing Square Capital Management, L.P., and Professor Ronald J. Gilson, who has been nominated by Pershing Square to serve as an independent director of Target Corporation (NYSE: TGT), expressed disappointment with Target’s response to Professor Gilson’s letter seeking the use of a universal proxy card, naming both Target’s and Pershing Square’s nominees, for use in connection with Target’s upcoming Annual Meeting of Shareholders.

“Rather than causing confusion, the proposal would eliminate confusion by giving shareholders something they would otherwise lack – the simple chance to choose the best among all of the candidates, rather than between two slates of candidates.” commented Professor Gilson. Pershing Square believes that the adoption by both Target and Pershing Square of a universal proxy card would reflect best-in-class corporate governance, and would result in the most qualified directors being elected, regardless of which proxy card a shareholder returned.

On the universal proxy card proposal, Bill Ackman of Pershing Square said, “it’s important for shareholders to have a choice so that they can vote for whichever candidates they prefer, regardless of which proxy card they submit. Pershing Square wants to provide shareholders with that freedom of choice. We are hoping Target will as well.”

Because proxy cards have not yet been mailed, and because new proxy cards are easy to print from the company’s or Pershing Square’s website, Pershing Square does not believe that adopting a universal proxy card would add any material expense to the proxy contest. Pershing Square also noted that it would be willing to bear the additional printing costs of the universal proxy cards.

Furthermore, Target’s public explanation for its refusal to use a universal proxy card does not address why Target would not permit its nominees to be named on Pershing Square’s Gold proxy card. Indeed, based on the timing of Target’s public response, Pershing Square questions how the matter could have been raised with its Board of Directors and whether Target’s nominees were given the opportunity to consent to being named on a universal proxy card or Pershing Square’s Gold proxy card.

Pershing Square requests Target’s nominees for permission to be included on the Gold proxy card in the event that the company will not consent to a universal proxy card.

[Full Disclosure:  We do not have a holding in TGT. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Autobytel Inc (NASDAQ:ABTL) has received a tender offer from Trilogy, Inc. at $0.35 per share. ABTL’s board is reviewing the offer and will advise its acceptence or rejection of the offer “on or before April 24, 2009.”

We started following ABTL (see our post archive here) because it was trading at a discount to its liquidation and net cash value and Trilogy, Inc. had been creeping up the register. Trilogy held 7.4% of ABTL’s outstanding stock prior to launching the tender offer. ABTL closed yesterday at $0.39, which is an 11% premium to Trilogy’s offer price, but still at a substantial discount to our estimate of ABTL’s liquidation value. We estimate that value to be around 38% higher still at $24.3M or $0.54 per share and ABTL’s net cash value to be around $15.4M or $0.34 per share.

Here’s Trilogy’s press release:


AUSTIN, Texas, April 20, 2009 – Trilogy Enterprises, Inc. (“Trilogy”), a provider of technology powered business services to the automotive industry, today announced that its wholly-owned subsidiary, Infield Acquisition, Inc., has commenced a tender offer to acquire all of the outstanding shares of common stock of Autobytel Inc. (Nasdaq: ABTL) for $0.35 net per share in cash.

The offer represents a 32% premium over the trailing 30-day average closing price of Autobytel’s common stock.

“We are pleased to offer a significant premium to Autobytel’s shareholders, ” stated Sean Fallon, Senior Vice President of Trilogy. “The automotive industry is experiencing an unprecedented decline and we believe that Autobytel must take steps now to ensure its shareholders receive the highest value. Given the significant risks of this business and the Company’s history of operating losses, we believe the premium offered is very attractive.”

“As Autobytel’s second largest stockholder and the beneficial owner of approximately 7.4% of Autobytel’s outstanding common stock, we have studied this business carefully. We have concluded that Autobytel’s ability to execute a turnaround and realize significant value for its stockholders is subject to significant and unacceptable risk. We believe that a high-premium, all-cash tender offer is the most effective way to maximize value for all stockholders. As a result, we have determined it is necessary to take the offer directly to our fellow stockholders in order to deliver significant value to them as expeditiously as possible,” added Mr. Fallon.

“We are confident our fellow stockholders will find that this compelling offer reflects a superior value for their shares, both in light of Autobytel’s current and recent trading history, as well as any realistic near or long term assessment of Autobytel’s prospects. We are committed to completing this offer and remain willing to work cooperatively with Autobytel,” concluded Mr. Fallon.

The tender offer is scheduled to expire at 12:01 A.M., New York City time, on Tuesday, May 19, 2009, unless extended. The tender offer documents, including the Offer to Purchase and related Letter of Transmittal, will be filed today with the Securities and Exchange Commission (“SEC”). Autobytel’s stockholders may obtain copies of the tender offer documents when they become available at http://www.sec.gov. Free copies of such documents can also be obtained when they become available by calling Morrow & Co., LLC, toll-free at (800) 662-5200.

The tender offer was detailed in a letter dated April 20, 2009 from Trilogy to ABTL’s President and Chief Executive Officer, Jeffrey H. Coats, and ABTL’s Board of Directors. The full text of the letter is set forth below:

April 20, 2009
Autobytel Inc.
18872 MacArthur Boulevard, Suite 200
Irvine, California 92612-1400
Attention: Mr. Jeffrey H. Coats, President and Chief Executive Officer

Ladies and Gentlemen:

Trilogy Enterprises, Inc. (“Trilogy”), through its affiliates, owns approximately 7.4% of Autobytel Inc.’s (“Autobytel” or the “Company”) stock and is Autobytel’s second largest stockholder. We have successfully created and delivered innovative solutions to the automotive industry for more than a decade.

We believe Autobytel is facing a crucial period in its corporate existence. The automotive market is undergoing a crisis so severe that it is difficult to adequately describe. Strong companies may find a way forward. Weak companies will undoubtedly fail.

Unfortunately, Autobytel has historically struggled to create an independently viable business. For example:

• In 2006, Autobytel incurred operating losses of $40MM on $85MM in revenue;

• In 2007, Autobytel incurred operating losses of $35MM (not including litigation settlement costs) on $84MM in revenue; and

• In 2008, Autobytel incurred operating losses of $36MM (before impairment charges and litigation settlement costs) on $71MM in revenue, which declined by 15% from the prior year.

Autobytel has itself acknowledged that the market is “extremely challenging” and it expects the U.S. automotive industry to decline more than 20% in 2009. Given the market outlook, what should stockholders reasonably expect from a company that has not proven itself viable historically?

We recognize that Autobytel has taken steps to address this crisis. However, we do not believe the steps taken are adequate to address the severity of the situation. Autobytel facing another corporate reorganization during potentially the worst market in history seems highly unlikely to prevail. The current plan appears akin to “let’s give this one last shot”. Unfortunately, shareholder cash and value is at stake.

Given Autobytel’s business prospects and the significant historical and recent operating losses, the Board should take steps now to preserve as much shareholder value as possible. We believe the only means to accomplish this is the immediate sale of the business.

We are aware that Autobytel had engaged a financial advisor to evaluate the possible sale of the Company. Autobytel announced that its advisor conducted an extensive process which resulted in Autobytel concluding that shareholder value could not be maximized in the current environment. We assume this means no buyer desired to pay a price required by the Board.

Today, our wholly-owned subsidiary has commenced a tender offer that provides stockholders with an opportunity to sell shares at $0.35 per share in cash. We believe this price is likely lower than the share price the Board aspired to obtain during the recent sale process. However, we believe it is a full and fair value for the Company and offers both an attractive premium for stockholders, as well as immediate liquidity for a stock that is thinly traded.

We hereby request that the Board support the proposed tender offer, and in doing so, consider the following:

• The offer represents a 32% premium on the stock’s trailing 30 day closing price;

• The offer provides immediate liquidity for all stockholders;

• The trading volume reported for April is less than 65,000 shares per day, on over 45 million shares outstanding;

• The Company is a sub-scale public company and may not be able to continue to bear the costs and obligations of a public company;

• The Company cannot withstand another shift in strategy during what may be the worst market in history;

• The Company may not be able to continue to bear the costs of its management team, including the lucrative packages offered to its recent hires;

• The Company recently issued executive stock options at $0.35 per share, which the Company must believe is fair value;

• The Company had $32MM in cash in September and only $27MM in December;

• The Company continues to burn cash and is likely to do so for the foreseeable future. It is reasonable to believe that the Company may run out of cash by the end of 2010;

• Without at least breakeven results, stockholder value will only continue to deteriorate until no stockholder value remains;

• Any acquiror must take on the Company’s cash burn and fund the Company in a highly uncertain environment; and

• Any acquirer may have to invest significant additional funds into the Company to make it operationally efficient and competitive.

It is time to stop the erosion in stockholder value. Looking at where Autobytel’s stock price traded a year ago is not indicative of the true value of the Company, but it should serve as a reminder of the value that was destroyed. Autobytel’s management should realistically evaluate the prospects for its business. A candid assessment of that situation should lead management to conclude that an all cash offer at a significant premium to all Company stockholders is in the best interests of the stockholders.

We are pleased to make this proposal to our fellow stockholders. We believe they will find it to be attractive in light of both the Company’s trading history, and a realistic assessment of the Company’s prospects. We are committed to completing this offer and hopeful that we will be able to work cooperatively with the Company in doing so.
We look forward to your timely response.

Trilogy Enterprises, Inc.

Trilogy’s offer is a little disappointing given that it is pitched at ABTL’s net cash value and at a large discount to its liquidation value. The discount is a direct result of the poison pill adopted by ABTL in 2004. From the most recent 10K:

Preferred Shares Purchase Rights Plan

In July 2004, the Board of Directors approved the adoption of a stockholder rights plan under which all stockholders of record as of August 10, 2004 received rights to purchase shares of Series A Junior Participating Preferred Stock. The rights were distributed as a non-taxable dividend and will expire July 30, 2014.

The rights will be exercisable only if a person or group acquires 15% or more of the common stock of the Company or announces a tender offer for 15% or more of the common stock. If a person or group acquires 15% or more of the common stock, all rightholders, except the acquirer, will be entitled to acquire at the then exercise price of a right that number of shares of the Company’s common stock which at the time will have a market value of two times the exercise price of the right. Under certain circumstances, all rightholders, other than the acquirer, will be entitled to receive at the then exercise price of a right that number of shares of common stock of the acquiring company which at the time will have a market value of two times the exercise price of the right. The initial exercise price of a right is $65.00.

The Board of Directors may terminate the rights plan at any time or redeem the rights prior to the time a person or group acquires more than 15% of the Company’s common stock.

In January 2009, the stockholder rights plan was amended to allow Coghill Capital Management LLC and certain of its affiliates (collectively “Coghill”) to hold up to 8,118,410 shares without becoming an acquiring person under the stockholders rights, subject to various conditions set forth in the amendment, including Coghill’s execution of and compliance with a standstill agreement.

We believe this is the opening salvo in Trilogy’s tender offer, and a higher price is possible if the board terminates the rights plan. We’ll watch the developments with interest.

[Full Disclosure:  We do not have a holding in ABTL. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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