Thursday, May 03, 2007

Loeb's Third Point Wants a Sale of Glenayre Technologies (GEMS)

In a 13D filing on Glenayre Technologies, Inc. (Nasdaq: GEMS), Dan Loeb's Third Point LLC disclosed a 6.3% stake (4.4 million shares) in the company. The firm believes the stock is materially undervalued and said the best outcome for shareholders would be for management and the Company's board of directors to immediately abandon their strategy to build the Company through acquisitions and a "digital business plan" and to promptly commence an auction to sell the Company.

From the 'Purpose of Transaction' section of the filing:

The Reporting Persons believe that the Common Stock is materially undervalued and are concerned that this undervaluation will persist if the Company remains an independent public company under current management. A meeting on April 11, 2007 between a representative of the Management Company, on the one hand, and James Caparro, President and CEO of the Company, and Matthew Behrent, Chief Acquisition Officer of the Company, on the other hand, further heightened these concerns. As a result, the Reporting Persons believe that the best outcome for the Company's shareholders would be for management and the Company's board of directors (the "Board") to immediately abandon their strategy to build the Company through acquisitions and a "digital business plan" and to promptly commence an auction to sell the Company. The Reporting Persons believe that a sale of the Company would be advantageous to the Company's shareholders because, among other things, strategic or private equity buyers could materially reduce the enormous and wasteful SG&A spending at the Company and take full andimmediate advantage of the Company's valuable $355 million of combined U.S. and foreign net operating losses ("NOLs"), which begin to expire this year.

After giving value to the Company's NOLs and adding back to earnings what the Reporting Persons view as unnecessary and extravagant management compensation (which could be almost completely eliminated by a buyer of the Company), as well as the costs of compliance with the Sarbanes-Oxley Act of 2002and other audit related costs, the Reporting Persons calculate that the Company currently trades at less than 2X adjusted EBITDA, making it a logical buyout target for strategic or private equity firms at a considerably higher valuation.

The Reporting Persons also believe that given the Common Stock's current valuation, as well as the apparent inability of the Company to cut SG&A spendingor adequately utilize its NOLs as an ongoing entity, acquisitions or expansion strategies would be destructive of shareholder value, especially on a risk-adjusted basis. Accordingly, the Reporting Persons believe that by far the best outcome for shareholders, and the only logical decision for management and the Board, would be for the Company to immediately hire financial advisors toc onduct a sale.

The Reporting Persons' other concerns regarding the Company include:

1) Management compensation at the Company is substantially above scale for a company of its size, yet the Board continues to institute raises for management members. The Reporting believe that this largesse is undeserved because they believe that (a) the Company, at least at the corporate level, essentially runs itself, and (b) management has accomplished little of strategic significance since coming into office.

2) The Board received total compensation of in excess of $750,000 in 2006, which the Reporting Persons believe is absolutely outrageous for a company of this size.

3) The Reporting Persons believe that management is currently incentivized through compensation practices to "do deals" rather than to create shareholder value and, as a result, is focused more on finding ways to acquire assets rather than doing what is best for shareholders. Certain members of management are contractually entitled to awards of stock options upon completion of certain acquisitions. Our fears were significantly enhanced by our April 11 meeting with Messrs. Caparro and Behrent, in which it became clear that the Company is more focused on a big-picture strategic vision than what is economically best for the owners of the Company.

4) Mr. Caparro holds "profits interests" issued by Entertainment Distribution Company, LLC ("EDC"), a subsidiary of the Company, through which he is entitled to receive a portion of profit distributions made by EDC and which are designed to function like options. The Board has stated that it is considering whether to exchange such EDC profits interests for equity of the Company, and the Reporting Persons are concerned that Mr. Caparro will unduly benefit from an exchange of these "options" into Company "equity" while the Common Stock valuation is temporarily depressed.

The Reporting Persons are hopeful that these issues will all soon be moot, as management and the Board will do what the Reporting Persons believe is clearly best for shareholders and put the Company up for sale. Should management and the Board attempt a different, value-destructive course, the Reporting Persons will explore all legal and other options to stop their actions- including removing them from office.

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