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