I've written a handful of draft letters to the Board, but as the vote on the deal approaches (8/28), I've grown resigned to its reality and decided to write directly to management, to thank them for their work over the years.
The ARIS CEO / CFO team were among the highest quality I've encountered in my years of institutional finance and it wholly sucks that we public investors can no longer access their expertise. I'd hoped to own this company for far longer and with more value creation. It is a risk of public ownership for such assets to be taken.
Among the issues that really burns is how the whole proxy seemed an exercise in "mansplaining" that this idea to sell was actually a good one for investors. It spoke often (16 times) of the effort to "explore alternatives" but in the end it seems an impatient Board made the decision to sell then sought the highest price it could get at the moment, alternatives be damned.
It is rare to see - perhaps even antithetical to ego and hubris - a group of men get together, put in work and effort, and decide that "not doing" is the best solution, but unless operations are changing for the worse in ways we do not know, then "not doing" seemed the best course.
The compounding benefits of generating cash and re-investing it at high rates creates explosive value over time. I don't know why the Board decided they were short on it.
Roy / Bill -
This is likely my last opportunity to communicate with you as a public shareholder and I'd like to use it - primarily, but not exclusively - as an opportunity to express gratitude for the way you've run your business, for the enlightening conversations and interactions I've enjoyed since becoming a shareholder in 2013 and of course for the return on investment I experienced over that time.
Not everything you did was perfect - no one should ever expect that - but you've done a remarkable job adjusting and learning from mistakes, adapting as necessary, not shying away from difficult decisions that others likely would have avoided and especially for always explaining your reasons when they were not obvious.
All of this is to say that in my nearly 15 years as an institutional analyst on "Wall Street" you are among the most extraordinary executive teams I've ever encountered, a belief that is not diminished by the pending sale.
However, I do object to the sale, for the following four reasons:
1. The valuation multiple is too low. The Board is selling an extraordinary company at a slight premium to a "median multiple". That is absurd. They should have used the Cox / DealerTrack acquisition as a starting point to negotiations and if they couldn't get the appropriate multiple for this extraordinary asset, they should have walked away.
2. Your projections are too low. Your EBITDA this year and next is understated. Investments in India haven't yet come to fruition. Auction123 hasn't matured. No credit is given to your ability to generate cash flow and reallocate it towards high return acquisitions.
3. The deal reeks of impatience. I know you and Board believed your stock wasn't trading at "the right multiple" but selling it at the wrong multiple doesn't fix that, it only makes the mispricing permanent to public shareholders. This affront is multiplied by the fact that this sale is taking place just as the market was starting to value the company more prudently, something the Board completely discounted.
4. Finally, you are rare and unusual assets. This deal doesn't compensate us for the difficult task of having to find another "Roy and Bill".
Though it is most unfortunate that we public shareowners will no longer be able participate in the compounding effect of your managerial prowess, there is nothing I can do about it now. I can simply take away from this experience an example of what quality leadership, cash flow generation, capital allocation and engagement with shareholders is supposed to look like.
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- Long Cast Advisers
- Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com