For God’s sake, let us sit upon the ground
And tell sad stories of the death of kings;
– King Richard II, Shakespeare’s Richard II
Coho Capital 2Q20 Commentary: Podcasts, The New Talk Radio
Coho Capital commentary for the second quarter ended June 30, 2020. Q2 2020 hedge fund letters, conferences and more Dear Partners, Coho Capital returned 46.6% during the first half of the year compared to a loss of 3.1% in the S&P 500. Many of our holdings, such as Netflix, Amazon, and Spotify, were perceived beneficiaries Read More
Frank Voisin is the author of the popular value focused website Frankly Speaking, found at http://www.FrankVoisin.com.
This week I closed my position in GTSI Corp. (NASDAQ: GTSI) which was one of my longest holdings and I think the subject of more posts on this site than any other (I was young and had too much focus to talk about much else). It has been quite a ride and I feel compelled to provide a eulogy.
Where else to begin but with my first post? In early 2010 I purchased GTSI, noting its status as an NCAV and its ownership of Eyaktek as an undervalued asset. On an asset basis the company was ridiculously undervalued, but given its low returns on those assets I felt that the earnings power valuation was more relevant, and I pegged the company at a value between $7.69 and $8.46.
Six months later, I was pleased to see that its partially owned subsidiary was channeling pac man and making a bid for the parent, GTSI. The bid was for $7.00 which I thought was on the low side. Given the unwillingness of GTSI’s management to negotiate, I made the risky decision to hold on, believing that EyakTek would be forced to increase its bid or a third party bidder would emerge.
Very shortly after this, I was vindicated in that EyakTek took the uncommon step of increasing its offer without any other bidders emerging. The new offer price was $7.50.
Did I sell? Oh no. This was still below the low-end of the range and, emboldened by my earlier correct call, I decided to press on.
The fates don’t like to be tempted, and just a few weeks after this, the government announced it was banning GTSI from bidding on federal government contracts. It would be an understatement to say that these contracts represented GTSI’s bread and butter. They made up 90% of GTSI’s revenue and so this was a crushing blow. EyakTek withdrew its offer and the share price collapsed. In one fell swoop, I had turned a massive gain into a massive loss.
Fast forward two years later, and the company had finally digested its past problems that led to the government suspension and it recently sold EyakTek for $20 million (confirming my earliest thesis that EyakTek was a highly undervalued asset).
The company spent $5 million of this on share repurchases (which were highly accretive given that the company was trading so far below book) and, to my dismay, spent the remainder on buying an IT services company, furthering management’s quest to transform the company. I found this to be a highly risky strategy and would have preferred they spend the full amount on repurchases. Still, I held on.
The company was just ramping up its sales force which had been dramatically cut after the government suspension. It was still an NCAV. There were a lot of things to like and I believed that by late 2012 or 2013 we would see the company back at its pre-suspension operating levels.
Then on Monday I was treated to this news:
GTSI TO BE ACQUIRED BY UNICOM SYSTEMS THROUGH CASH TENDER OFFER
Stockholders to Receive $7.75 Per Share in Cash; Transaction Valued at $ 76.67 Million
GTSI Postpones Annual Meeting of Stockholders
HERNDON, Va., May 7, 2012– GTSI ® Corp. (NASDAQ: GTSI), a systems integration, solutions and services provider to government, today announced it has entered into a definitive agreement to be acquired through a cash tender offer at $7.75 per share by an affiliate of UNICOM®Systems, Inc. (“UNICOM”), a global information technology company and part of the UNICOM® group of companies, in a transaction with an expected total value of approximately $76.67 million. Under the terms of the agreement, which was unanimously approved by a special committee of independent GTSI directors and GTSI’s full Board of Directors, the tender offer is not subject to any financing contingencies.
The per share purchase price of the tender offer represents a premium of approximately 47.9% over GTSI’s closing stock price as of May 5, 2012 and approximately 65.6% over its one-year average closing stock price.
“The announcement of this offer represents an attractive opportunity to deliver premium value and liquidity to GTSI’s shareholders. I am excited about the potential for future growth with a strategic partner of UNICOM’s stature and global reach. There is an excellent opportunity to realize short- and long-term benefits for our customers, employees and OEM partners.” said Sterling Phillips, GTSI’s President and Chief Executive Officer.
Corry Hong, UNICOM’s founder and Chief Executive Officer stated, “Over the past 30 years, UNICOM has built a global reputation for excellence in serving information technology buyers in government and Fortune 1000 enterprises. The acquisition of GTSI represents the next step in expanding UNICOM’s ability to deliver world-class IT products and services to enterprise customers.”
Though it would be nice to say my perseverance paid off, the fact is that I should have sold in 2010. The additional ~$0.25 gain hardly compensated for the time. Though, thankfully, this still represents alpha of around 41% (S&P 500 as the benchmark).
On one hand, I should be happy, but I am still left with regret. I had hoped that, given the EyakTek win, we would see the company sell for closer to the high end of its intrinsic value range (which I would argue is higher today than it was in 2010). I am thankful for the sale, but I am worried to see others now commenting publicly that they are considering holding their positions because Unicom’s offer of $7.75 is below their calculations of intrinsic value.
From someone that has been in that trench before all I can say is that this is an extremely risky strategy and that in my mind now is the right time to sell, regardless of what your spreadsheet is telling you. While the odds of an increase in the sale price or a collapse of the deal are less today than they were in 2010 (this deal was unanimously approved by GTSI’s board, which stands in stark contrast to the situation in 2010), I think the potential extra upside is nowhere near enough compensation for taking on the risk of the potential downside if this deal does fall through.
You can read all of my old GTSI posts here.
What do you think of GTSI?
Author Disclosure: No longer long GTSI!