Autobytel (ABTL) Higher After Large Holder Calls For Restructuring or Sale
In an amended 13D filing on Autobytel (Nasdaq: ABTL) 8.96% holder Liberate Technologies disclosed a letter sent to the company stating: "We are one of Autobytel's largest shareholders. We invested in Autobytel because the company is positioned for significant upside and could become the leading online automotive firm. However, the company is also at a crossroads.
We believe that the company has three strategic choices. First, the company could move immediately to restructure its business, streamline its operations, reform its corporate governance and position itself for future growth. Second, it could engage in a sale process to maximize near-term value for shareholders. Or third, it could continue down the current path, and make no significant tactical or strategic adjustments.
We believe the first path leads to the greatest shareholder value over time and we strongly recommend it. But if the board is unwilling to implement change, then the company should immediately pursue a sale process. The third path will simply be a continuation of the last seven years - a steady destruction of shareholder value. We discuss our thoughts on these alternatives below."
A Copy of the Letter:
September 7, 2006
Gentlemen:
We are one of Autobytel's largest shareholders. We invested in Autobytelbecause the company is positioned for significant upside and could become theleading online automotive firm.
However, the company is also at a crossroads. We believe that the company hasthree strategic choices. First, the company could move immediately torestructure its business, streamline its operations, reform its corporategovernance and position itself for future growth. Second, it could engage in asale process to maximize near-term value for shareholders. Or third, it couldcontinue down the current path, and make no significant tactical or strategicadjustments.
We believe the first path leads to the greatest shareholder value over time andwe strongly recommend it. But if the board is unwilling to implement change,then the company should immediately pursue a sale process. The third path willsimply be a continuation of the last seven years - a steady destruction ofshareholder value. We discuss our thoughts on these alternatives below.
Positioning the Company for Long Term Growth
--------------------------------------------
Online automotive lead generation and advertising is one of the largest andfastest growing Internet sectors - and Autobytel is at the heart of it.Autobytel's compelling web sites and content attract over 3 million uniquevisitors each month, connecting consumers to an established base of over 6,000dealers. The company has also put together a professional and dedicatedworkforce, one of the best and most experienced in the business. Furthermore,we believe that a win in the Dealix patent litigation this November would openthe door to numerous lucrative licensing opportunities. In our view, thepotential upside for the company's lead generation, advertising, and patentlicensing businesses has never been greater.
Yet, despite many strengths and a highly favorable industry environment,Autobytel has consistently failed to achieve profitability. Today, the companycontinues to report losses, even as other similar online automotive concernsare profitable. For the 2nd Quarter of FY06, Autobytel's losses totaled $ 7.8mmand the company has forecast continued losses for the balance of this year andthe next. During 2005, Autobytel's stock declined 18%. So far this year, thestock has plummeted an additional 46%.
We strongly recommend that the board implement the three initiatives outlinedbelow. The result will be a company that is strategically focused, solidlyprofitable and shareholder friendly.
Strategic Focus
Autobytel should be an online media business that focuses on lead generation,advertising, and patent licensing. Together, lead generation and advertisingrepresented 75% of revenues last quarter, and have the characteristics of anonline media Internet business: low cost with high leverage. Unfortunately,this valuable business is mixed in with a much different one: a CRM softwarebusiness selling to thousands of auto dealers and requiring a disproportionateshare of employee headcount and management time. Like most software operationsfor small enterprises, the CRM business operates on much lower margins andrequires more people than an internet-based business in the areas of ongoingdevelopment, customer support, upgrades and maintenance. Furthermore,Autobytel's CRM business lacks the scale to generate significant returns.
We believe there are strategic buyers, already operating CRM softwaredivisions, which would pay a significant multiple for this CRM business toleverage their existing infrastructure. For Autobytel, a sale of the CRMbusiness would generate cash, significantly reduce headcount, and focus themanagement and employees on the core business of the company.
Profitability
As an online lead generation and advertising company, Autobytel will requiresignificantly less headcount. Autobytel recently reported headcount ofapproximately 400 employees, after redundancies, plus an unspecified number ofcontractors. Even assuming one hundred employees are associated with the CRMbusiness, Autobytel has excess staff. For example, Autobytel has SG&A headcountestimated to be in excess of 80 people. Compared with other online leadgeneration and advertising companies, Autobytel has significantly higherheadcount across most departments. This is reflected in the company's incomestatements: gross margins are in line with industry comparables, while netmargins are not. As losses have continued to mount, the company nonetheless hasprojected increased spending. We believe that the company should right size toappropriately match its revenue opportunities.
Once Autobytel reduces headcount to industry norms, the company should besolidly profitable. We estimate that, properly staffed, the online leadgeneration and advertising business, at current revenue and gross marginlevels, should generate in excess of $20 million in pre-tax profit annually.
Corporate Governance
Of the six current members of the Autobytel board, five have been directorsand/or executive officers since the firm went public, seven years ago (thesixth, Jim Riesenbach, was hired as CEO in March 2006). Over this seven-yearperiod, these five directors have led a company in which cumulative losses havetotaled over $100 million. Under the watch of these five board members, thecompany has experienced an accounting scandal, failed joint ventures, andmanagement turmoil. And the result has been a disaster for all shareholders -both employees and non-employees. During this board's tenure, the stock pricehas declined 93%.
Yet, during this period, there has been no change in these board members. Onthe contrary, the board has insulated itself by various legal maneuvers andcharter provisions to prevent shareholders from holding board membersaccountable. For example, Autobytel currently has a classified board, allowingshareholders to vote on each director only once every three years. Theshareholders should have the right to determine who represents them on theboard, and the right to change those representatives, if a majority of theshareholders wish to do so.
We are not suggesting that Autobytel dismantle its corporate defenses. To thecontrary, we believe that the company should continue to keep in place itspoison pill to prevent an unwanted buyer from purchasing the company on termsthat are opportunistic, coercive or that are otherwise not in the bestinterests of all shareholders. Shareholders should be protected from thesetactics, and the board should have the tools to do that.
But that should not prevent Autobytel shareholders from determining who shouldrepresent them. We therefore recommend that the Autobytel board call a specialmeeting of shareholders to declassify the board this year. If the boardbelieves it has the support of shareholders, then the directors should not feara vote at the annual meeting next year.
Implementing this initiative will go a long way, in our view, to restoringinvestor confidence in the Autobytel board. To this end, Liberate has alsooffered two experienced board members to assist and further strengthen thatconfidence: there is no more shareholder-friendly board than one comprised ofrepresentatives of significant shareholders.
Engage in a Sale Process
------------------------
We have outlined three initiatives that we believe will allow Autobytel tocapitalize on the significant market opportunity that exists today and in theyears ahead. We strongly believe this path represents the best choice tomaximize shareholder value over the longer term.
But if the board is unwilling to make the changes to allow Autobytel tosucceed, then we believe this board should step aside, and allow anothercompany to take Autobytel forward. We have spoken with several strategic buyersthat would take the steps necessary, as part of an acquisition of Autobytel, toallow the company to grow and to prosper. They have indicated to us awillingness to immediately begin discussions on an acquisition. If the board isunwilling to make the changes required, then a prompt sale of the company is inthe best interests of customers, employees and shareholders.
Staying the Course
------------------
We have seven years of data on what the future holds if we stay the currentcourse.
Over that time period, the company has been plagued by financial scandal,strategic misdirection and management turnover. The company was forced torestate its public financial statements for three fiscal years, shakinginvestor confidence in the board and its audit committee. The board authorizeda set of disastrous joint ventures in Japan, Germany and the U.K., all ofwhich, by the company's own admission, have been failures. The company has alsoconsistently promised profitability, only to then over-hire and overspend,allowing costs to overwhelm strong revenue growth. Furthermore, the board hasbeen unable to attract and retain senior leadership - Jim Riesenbach is now thefirm's fourth CEO in four years, and the directors are preparing to hire thefirm's third CFO in just two years.
Next Steps
----------
As we said at the beginning of this letter, we believe Autobytel is now at acrossroads. We respectfully request that you consider our recommendationscarefully and seriously and act on them promptly. And we request youcommunicate publicly with all shareholders, regardless of size, which of thethree paths you have determined to take by September 21, 2006.
We urge the board to make the changes necessary to allow the company to moveforward- strategically focused, solidly profitable and shareholder friendly.Let's give the experienced and dedicated employees of Autobytel the chance toenjoy the success they have been working so hard to achieve.
Sincerely,
Philip A. Vachon
Director and President
Liberate Technologies
Sign-Up for E-Mail Alerts on ABTL (Free) and 13D Filings (Premium Only)
We believe that the company has three strategic choices. First, the company could move immediately to restructure its business, streamline its operations, reform its corporate governance and position itself for future growth. Second, it could engage in a sale process to maximize near-term value for shareholders. Or third, it could continue down the current path, and make no significant tactical or strategic adjustments.
We believe the first path leads to the greatest shareholder value over time and we strongly recommend it. But if the board is unwilling to implement change, then the company should immediately pursue a sale process. The third path will simply be a continuation of the last seven years - a steady destruction of shareholder value. We discuss our thoughts on these alternatives below."
A Copy of the Letter:
September 7, 2006
Gentlemen:
We are one of Autobytel's largest shareholders. We invested in Autobytelbecause the company is positioned for significant upside and could become theleading online automotive firm.
However, the company is also at a crossroads. We believe that the company hasthree strategic choices. First, the company could move immediately torestructure its business, streamline its operations, reform its corporategovernance and position itself for future growth. Second, it could engage in asale process to maximize near-term value for shareholders. Or third, it couldcontinue down the current path, and make no significant tactical or strategicadjustments.
We believe the first path leads to the greatest shareholder value over time andwe strongly recommend it. But if the board is unwilling to implement change,then the company should immediately pursue a sale process. The third path willsimply be a continuation of the last seven years - a steady destruction ofshareholder value. We discuss our thoughts on these alternatives below.
Positioning the Company for Long Term Growth
--------------------------------------------
Online automotive lead generation and advertising is one of the largest andfastest growing Internet sectors - and Autobytel is at the heart of it.Autobytel's compelling web sites and content attract over 3 million uniquevisitors each month, connecting consumers to an established base of over 6,000dealers. The company has also put together a professional and dedicatedworkforce, one of the best and most experienced in the business. Furthermore,we believe that a win in the Dealix patent litigation this November would openthe door to numerous lucrative licensing opportunities. In our view, thepotential upside for the company's lead generation, advertising, and patentlicensing businesses has never been greater.
Yet, despite many strengths and a highly favorable industry environment,Autobytel has consistently failed to achieve profitability. Today, the companycontinues to report losses, even as other similar online automotive concernsare profitable. For the 2nd Quarter of FY06, Autobytel's losses totaled $ 7.8mmand the company has forecast continued losses for the balance of this year andthe next. During 2005, Autobytel's stock declined 18%. So far this year, thestock has plummeted an additional 46%.
We strongly recommend that the board implement the three initiatives outlinedbelow. The result will be a company that is strategically focused, solidlyprofitable and shareholder friendly.
Strategic Focus
Autobytel should be an online media business that focuses on lead generation,advertising, and patent licensing. Together, lead generation and advertisingrepresented 75% of revenues last quarter, and have the characteristics of anonline media Internet business: low cost with high leverage. Unfortunately,this valuable business is mixed in with a much different one: a CRM softwarebusiness selling to thousands of auto dealers and requiring a disproportionateshare of employee headcount and management time. Like most software operationsfor small enterprises, the CRM business operates on much lower margins andrequires more people than an internet-based business in the areas of ongoingdevelopment, customer support, upgrades and maintenance. Furthermore,Autobytel's CRM business lacks the scale to generate significant returns.
We believe there are strategic buyers, already operating CRM softwaredivisions, which would pay a significant multiple for this CRM business toleverage their existing infrastructure. For Autobytel, a sale of the CRMbusiness would generate cash, significantly reduce headcount, and focus themanagement and employees on the core business of the company.
Profitability
As an online lead generation and advertising company, Autobytel will requiresignificantly less headcount. Autobytel recently reported headcount ofapproximately 400 employees, after redundancies, plus an unspecified number ofcontractors. Even assuming one hundred employees are associated with the CRMbusiness, Autobytel has excess staff. For example, Autobytel has SG&A headcountestimated to be in excess of 80 people. Compared with other online leadgeneration and advertising companies, Autobytel has significantly higherheadcount across most departments. This is reflected in the company's incomestatements: gross margins are in line with industry comparables, while netmargins are not. As losses have continued to mount, the company nonetheless hasprojected increased spending. We believe that the company should right size toappropriately match its revenue opportunities.
Once Autobytel reduces headcount to industry norms, the company should besolidly profitable. We estimate that, properly staffed, the online leadgeneration and advertising business, at current revenue and gross marginlevels, should generate in excess of $20 million in pre-tax profit annually.
Corporate Governance
Of the six current members of the Autobytel board, five have been directorsand/or executive officers since the firm went public, seven years ago (thesixth, Jim Riesenbach, was hired as CEO in March 2006). Over this seven-yearperiod, these five directors have led a company in which cumulative losses havetotaled over $100 million. Under the watch of these five board members, thecompany has experienced an accounting scandal, failed joint ventures, andmanagement turmoil. And the result has been a disaster for all shareholders -both employees and non-employees. During this board's tenure, the stock pricehas declined 93%.
Yet, during this period, there has been no change in these board members. Onthe contrary, the board has insulated itself by various legal maneuvers andcharter provisions to prevent shareholders from holding board membersaccountable. For example, Autobytel currently has a classified board, allowingshareholders to vote on each director only once every three years. Theshareholders should have the right to determine who represents them on theboard, and the right to change those representatives, if a majority of theshareholders wish to do so.
We are not suggesting that Autobytel dismantle its corporate defenses. To thecontrary, we believe that the company should continue to keep in place itspoison pill to prevent an unwanted buyer from purchasing the company on termsthat are opportunistic, coercive or that are otherwise not in the bestinterests of all shareholders. Shareholders should be protected from thesetactics, and the board should have the tools to do that.
But that should not prevent Autobytel shareholders from determining who shouldrepresent them. We therefore recommend that the Autobytel board call a specialmeeting of shareholders to declassify the board this year. If the boardbelieves it has the support of shareholders, then the directors should not feara vote at the annual meeting next year.
Implementing this initiative will go a long way, in our view, to restoringinvestor confidence in the Autobytel board. To this end, Liberate has alsooffered two experienced board members to assist and further strengthen thatconfidence: there is no more shareholder-friendly board than one comprised ofrepresentatives of significant shareholders.
Engage in a Sale Process
------------------------
We have outlined three initiatives that we believe will allow Autobytel tocapitalize on the significant market opportunity that exists today and in theyears ahead. We strongly believe this path represents the best choice tomaximize shareholder value over the longer term.
But if the board is unwilling to make the changes to allow Autobytel tosucceed, then we believe this board should step aside, and allow anothercompany to take Autobytel forward. We have spoken with several strategic buyersthat would take the steps necessary, as part of an acquisition of Autobytel, toallow the company to grow and to prosper. They have indicated to us awillingness to immediately begin discussions on an acquisition. If the board isunwilling to make the changes required, then a prompt sale of the company is inthe best interests of customers, employees and shareholders.
Staying the Course
------------------
We have seven years of data on what the future holds if we stay the currentcourse.
Over that time period, the company has been plagued by financial scandal,strategic misdirection and management turnover. The company was forced torestate its public financial statements for three fiscal years, shakinginvestor confidence in the board and its audit committee. The board authorizeda set of disastrous joint ventures in Japan, Germany and the U.K., all ofwhich, by the company's own admission, have been failures. The company has alsoconsistently promised profitability, only to then over-hire and overspend,allowing costs to overwhelm strong revenue growth. Furthermore, the board hasbeen unable to attract and retain senior leadership - Jim Riesenbach is now thefirm's fourth CEO in four years, and the directors are preparing to hire thefirm's third CFO in just two years.
Next Steps
----------
As we said at the beginning of this letter, we believe Autobytel is now at acrossroads. We respectfully request that you consider our recommendationscarefully and seriously and act on them promptly. And we request youcommunicate publicly with all shareholders, regardless of size, which of thethree paths you have determined to take by September 21, 2006.
We urge the board to make the changes necessary to allow the company to moveforward- strategically focused, solidly profitable and shareholder friendly.Let's give the experienced and dedicated employees of Autobytel the chance toenjoy the success they have been working so hard to achieve.
Sincerely,
Philip A. Vachon
Director and President
Liberate Technologies
Sign-Up for E-Mail Alerts on ABTL (Free) and 13D Filings (Premium Only)
posted by Lon at 10:55 AM
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