Thursday, October 9, 2008

Shareholder retention program

The shares closed at $2.15, another all-time low closing price after the market fell off the cliff again today. I've talked about a share buyback the last few weeks and have gotten various opinions. Some companies that have done share buybacks have seen their stock tank with the market anyway. Some people mentioned it would only provide a short term boost (if that) and shorts would just use the price uplift to attack the shares more. Some have mentioned that its better to have the cash as a buffer for the uncertain environment. "Cash is king" Really?

The company's "long standing" position is that their "near term" goals are to get back to growth and profitability. Re-read that 10 times and see if it makes sense :-) According to them, this is the major driver of the share price. Really? :-) The problem is that their growth businesses (iptv, ngn, and broadband) only make up 1/3 of their current revenue base and PAS/handsets are not growing/declining. Their expenses are still way too high and they refuse to make substantial cuts. So, despite Peter's repeated expense targets and growing revenues by several hundred million, it doesn't seem probable in the "near term".

As a long-time suffering shareholder, it just hasn't paid to be in the stock. A lot of other shareholders are jumping ship as well. Therefore, it is imperative to have a shareholder retention program that could actually work to stabilize the shareholder base. My proposal is as follows:

1. Announce a special dividend payment of 50 cents/share to shareholders to be paid out one year from now.
2. Announce another special dividend payment equal to the amount to be received from the PCD sale (remaining performance payment up to $50m depending on PCD performance). This will be paid end of 2010, 2 years from now.

Here are the benefits/details of the program:

1. The company will have $325m in net cash by the end of the year. Spending $60m by end of 2009 will not impact cash flows until late 2009, where profitability "should" be closer.
2. Shareholders will have a reason to stick around for dividend payments the next two years and actually get a guaranteed payment equal to about 50% of the current price (unbelievable).
3. Shorts can continue to short or keep their positions but they will have to bring out cash giving them incentive to get out of their positions in the next few months.
4. Insiders who own shares will benefit from the dividend payment. Previously, to benefit, they would have to rely on the shares appreciating and selling shares. They will also be motivated to keep their shares.
5. Employees who had options repriced at $3.24 might have a chance to benefit from a stronger stock price by then and may have incentive to keep the shares.
6. The payment in 2010 will not come from existing cash but from the PCD remaining money (up to $50m).
7. A share buyback doesn't help earnings/share because there is NO earnings. As some have mentioned, the shorts can just keep shorting what the company buys back as well.

I believe the above has real incentives for shareholders and shorts. The company can do something tangible by being creative without impacting short term liquidity. It will highlight their massive cash position, which at this stage is the company's strongest point. Shareholders will have confidence the board/management actually "cares" about shareholder value and will benefit themselves. Imagine some executives getting a nice $500k to $2m bonus dividend!

Anyway, just a thought on an otherwise horrible week for shareholders (on top of the last 4 years).