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Floridians Bid for CoSine

Light Reading
News Analysis
Light Reading
12/23/2002

Wyndcrest Holdings, LLC, a Florida-based venture firm focused on investments in technology and digital entertainment, upped the ante today on its bid to acquire CoSine Communications Inc. (Nasdaq: COSN). The firm increased its cash offer to $95.5 million, or approximately $9.50 per share for CoSine's 10 million outstanding shares.

CoSine rejected the firm’s first proposal on Friday. Originally, Wyndcrest Holdings was offering about $91.6 million, or roughly $9.11 per share. The company’s stock closed at $3.93 on Thursday before the news of the potential acquisition was made public.

Since the second offer was made public, the stock has been climbing. It shot up $0.89 (17.38%) today to $6.01.

“We both agree that CoSine is undervalued,” says Terry Gibson, CFO of CoSine. “They seem to think it’s best to pull up the stakes and liquidate. But we think there is another path to take. We don’t have blinders on, but we are winning new business and we think we can turn profitable.”

John Textor, president and founder of Wyndcrest Holdings says he is offended by CoSine's assertion that his firm is looking to simply liquidate the company. He says that he and his partners are trying to preserve the technology and help shareholders get the most value out of their investment.

“We believe CoSine’s business model represents a liquidation scenario, a steady burn of distributable cash before the likely realization that the company cannot overcome a challenging market environment that remains beyond its control,” he says. “The Wyndcrest proposal should be seen as a shareholder value preservation strategy.”

But he admits that liquidation is not out of the question if his firm takes control. He says he sees other options for the company, such as drastically reducing the burn rate and shelving product development until the market improves.

“It’s not as though this company has been around for a long time and built up this cash reserve,” says Textor. “They have this cash because they raised it in an IPO from the shareholders. The right thing to do would be to let the shareholders decide if the company should continue. It’s called corporate democracy.”

For the past several quarters, CoSine has seen its revenues drop dramatically. For the third quarter of 2002, which ended September 30th, the company reported $5.2 million in revenue (see CoSine's Quest for Cash); this was down from $6.1 million in the second quarter (see CoSine Reports Q2). The company ended the third quarter with $113.6 million in cash, having reduced its burn rate dramatically: It spent only $14 million in that quarter, while it had previously been spending roughly $28 million per quarter, says CoSine's Gibson. In early October, it cut roughly a third of its staff to help lower the burn rate even more. It currently has about 165 employees.

Gibson says the company is gaining traction among customers and has enough cash to wait out the storm until carriers begin spending again. Textor, however, says that might be a gamble that shareholders aren’t willing to take.

“The management team are all hard-working guys,” he says. “But they are all in denial. They think they can pull this out at the bottom of the ninth inning.”

While the entire industry has suffered from the lack of telecom spending, the sector that CoSine is in -- IP service switching -- has been hit especially hard. One of the biggest reasons is that router vendors like Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR) are starting to incorporate a lot of the same functionality into their devices.

The shakeout in the IP service switch market is already underway: Last week, Celox Networks shut its doors for good (see Is Celox Farewell an Omen?); Lucent Technologies Inc. (NYSE: LU) recently cancelled its SpringTide product (see Lucent Silences SpringTide); and startup Corona Networks Inc. is rumored to be barely hanging on (see Headcount: Shopping, Lifting, Moving On).

“We aren’t surprised about Celox running out of money or Lucent’s decision to cancel SpringTide,” says Gibson. “They weren’t getting much traction, but we have been.”

Wyndcrest has been pursuing a similar takeover deal with another small company focused on fixed wireless technology called Netro Corp. Like CoSine, Netro’s management also rejected the first proposal in August of this year. But due to shareholder pressure, the company enlisted help from Goldman Sachs & Co., which has since contacted Wyndcrest to help figure out what to do with the company, says Textor.

— Marguerite Reardon, Senior Editor, Light Reading

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Jakewk
Jakewk
12/5/2012 | 12:34:44 AM
re: Floridians Bid for CoSine
To reject an offer of $9.50 when your stock is trading at $3.98. The shareholders' interests must be considered as they are, technically, the owners of the company, which means they are the owners of the company's cash as well.
nomad
nomad
12/5/2012 | 12:34:44 AM
re: Floridians Bid for CoSine
So let me see if I have this right. The shareholders had valued a company with $100 million cash on hand at $40 million. In my mind that means that the products, employees and IP of the company are worth a combined -$60 million. Given that ringing endorsement by the market, the management should do the honorable Hari-Kari thing, paying out a $10 per share dividend and closing the doors.
OptoScot
OptoScot
12/4/2012 | 9:08:04 PM
re: Floridians Bid for CoSine
This smart piece of financial engineering is happening too often... It is opportunistic with the predator VC often making more out of it than existing shareholders..

It would be much more productive if existing shareholders worked with management to help set new plans or even new directions for such companies...

This sort of activity may be legal but it's highly immoral and certainly of no great benefit.
reoptic
reoptic
12/4/2012 | 9:07:39 PM
re: Floridians Bid for CoSine
Wyndcrest bolsters offer for CoSine


By Jeff Ostrowski, Palm Beach Post Staff Writer
Tuesday, December 24, 2002



PALM BEACH GARDENS -- Venture capital firm Wyndcrest Holdings on Monday boosted its bid for CoSine Communications Inc. to $95.5 million, and the California tech firm continued to brush off its suitor.

So why is Wyndcrest head John Textor pushing to buy a company that not only is uninterested in selling but also hemorrhaged $77 million in the first nine months of the year?

Simply put, Textor sees bargains in the smoldering wreckage of the dot-com crash of 2000. As investors have fled tech's former high fliers, lucrative ideas could disappear without a trace, Textor said.

"It's almost the equivalent of a Van Gogh being put through a paper shredder," he said.

Textor last month offered $158.5 million for Netro Corp. of San Jose, Calif., the fourth time this year Wyndcrest bid for the wireless network company. Although Netro didn't accept the deal, it hired Goldman Sachs to help it explore "strategic alternatives."

Textor said he'll pursue other struggling tech companies, such as Redwood City, Calif.-based CoSine (Nasdaq: COSN, $6.50), which makes equipment to protect corporate telecommunications networks from hackers.

Wyndcrest's latest bid is worth $9.50 a share. Last week it offered CoSine $91.6 million, or $9.11 a share. CoSine balked, saying the deal wasn't "in the best interests" of shareholders.

CoSine officials couldn't be reached for comment. But analyst Joanna Makris, who covers the company for Adams, Harkness & Hill in Boston, said she doesn't blame CoSine for rejecting the deal. After all, she said, CoSine has a promising product and $100 million in the bank, making Textor's proposal to liquidate the company unappealing.

"No one wants to see their company hacked up into bits," Makris said.

Textor, however, calls his offer of $9.50 a share the best deal for shareholders, considering that the stock was trading at $3.93 on Thursday, a day before Wyndcrest's first offer. CoSine shares have shot up on news of Wyndcrest's bid.

"For them to say no, they'd have to have a plan to get the company over $9 anytime soon," he said.

Textor, a 37-year-old Palm Beach County native who was a pro skateboarder as a teen, acknowledges that he'll likely make some losing bets as he shops for depressed tech companies.

Palm Beach Gardens-based Wyndcrest has invested in both winners and losers in recent years. The firm invested $600,000 in Art Technology Group of Cambridge, Mass., before that company's 1999 initial public offering of stock. Wyndcrest sold as Art Technology's shares rocketed.


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