Tuesday, 14 August 2007

Shareholder Value...How do you get it?


Years of management frustration over Brainhunter's low share price prompted management to announce August 13th, it is taking a strategic look at the company's future.
That no-option barred examination may result in the the company being taken off the public market.
Here's why.
Management has increased Brainhunter's growth substantially, growing sales from $2.8 million to over $225,000,000 in less than 6 years.
Management has increased the backlog of business to the tune of $400,000,000.

EBITDA has always been positive and now sits at over $8 million. The technology value of the company's proprietary software is just starting to emerge.

Management has always focused on avoiding dilution for shareholders, but debt is an obligation which can be hard for the average investor to deal with in a review.

Brainhunter has been able to acquire companies and increase sales with capital provided by low risk debt, some would say zero risk. The comment zero risk is from followers who point out that Brainhunter's bank debt is secured against low risk receivables, the type of receivables which traditionally have provided a zero per cent write off.

On the downside, management was delayed in some of their forecasts and this has helped drive the stock down. But now the company is finally delivering on all of its promises.

But despite the company's stellar growth, its stock price is low. Its organic growth will in all likelihood continue to be financed from low risk bank debt against increasing receivables. However, acquisitions require capital that should be financed from an equity raise. The problem with this is an equity raise would be dilutive and management will avoid that at all costs even if it means going private .... remember management and insiders own a large percentage of the company.

Yesterday, on August 13th, management announced they are looking at all alternatives, which will mainly include either selling the company or remaining on the public market.

Management is hungry to grow and is talking to those private equity players who recognize the value of Brainhunter. If support comes from this sector, a run at the stock will be made at some premium to the present market. If management can not engage someone then what are we looking at? Maybe the market is just too tough right now and fair value will not be recognized until EBITDA increases to a point where losses disappear. (The company estimates it will be in the black in 2009.) Or will a third option be considered .... sell the company? They have stated several times that they can at a major premium to the market.

Whatever management does, their goal in this exercise is to maximize shareholder value. They are firm in their belief that the market is grossly undervaluing the company and that they have a business which can grow to over $1 billion in gross revenues, with a four per cent bottom line in the foreseeable future. To get there, they are willing to put managements' stock in concert with private equity players to share in the upside with them because their public market support just doesn't seem to be there.... and the cost of dilution to get it to a fair market value is just too high.

John McKimm, Brainhunter's chairman and CEO, is betting stock is way too cheap.

Shareholders will find out very soon.

These are interesting times.