Optical/IP Networks

Mellon Buying More CoSine Stock

In shades of the 80s, when hostile takovers and proxy battles were nearly a daily occurence, the battle for control over CoSine Communications Inc. (Nasdaq: COSN) is heating up.

CoSine's largest institutional investor, Mellon HBV Alternative Strategies LLC, this week filed a schedule 13-D form with the Securities and Exchange Commission (SEC) indicating that it has bought another 89,346 shares of CoSine’s outstanding stock. Since February of this year, the firm has bought 444,346 shares of CoSine, bringing its total to 707,138. As a result, Mellon has increased its ownership to about 7.1 percent of the company’s outstanding shares.

Mellon claims that it was initially purchasing the stock only as an investment, but as CoSine continues to lose money and revenues continue to fall, it’s now acquiring shares to gain more control of the company, according to the filing.

For the past couple of months, Mellon has had ongoing discussions with CoSine’s management and board members about the direction of the company. But at each turn, CoSine has resisted the firm’s recommendation to look for an alternative strategy (see Mellon Pressures CoSine for Sale and CoSine: Not Ready to Sell). Now Mellon says it’s considering “whether to engage a financial advisor on its own behalf for purposes of exploring strategic alternatives available for maximizing stockholder value.”

Although it hasn’t yet solicited votes for a proxy, Mellon implied in the 13-D that it is headed in that direction.

Mellon's chief complaint is that CoSine, which has never been profitable, is burning through about $9 million in cash per quarter while its revenues continue to fall (see CoSine Investors Lash Out). Last quarter it only generated about $2.2 million in revenue. While CoSine’s management continues to say that the company has big plans in the works, it has not given any guidance.

Of course, there's a flipside to the argument: CoSine's management has contended in the past that the company has the right products; it just needs more time for the market to turn around. And there's always a chance that Mellon is just looking to drive the share price up so it can net a quick return.

A source close to the firm says that Mellon's goal is to sell the company. As startups like Timetra Networks, Vivace Networks, and WaveSmith Networks Inc. get acquired, a CoSine sale might not be too farfetched (see Alcatel & TiMetra Seal the Deal, Tellabs Snags Vivace for $135M, and Ciena Nabs WaveSmith). One thing all these companies have in common, including CoSine, is that their products all sit at the edge of a carrier network and can help migrate legacy traffic onto an IP/MPLS network.

While CoSine has not marketed its product as a broadband aggregation device, in the current Light Reading Insider, on B-RAS products, the company’s IPSX service switch gained high marks for its features and functionality in this market (see Getting a Bead on B-RAS ). The product has also gained accolades for its IP/VPN, which includes both IPSec and Layer 3 MPLS VPN support, plus network-based firewalling capabilities.

CoSine and Mellon both declined to comment for this story.

CoSine's stock closed up $0.17 (3.22%) to $5.45 today.

— Marguerite Reardon, Senior Editor, Light Reading

BobbyMax 12/5/2012 | 12:01:00 AM
re: Mellon Buying More CoSine Stock Considering the current value of its stock price and very bad business climate, it is unlikely that CoSine would be profitable. CoSine has not managed its expenses well. Its workforce has not been trimmed to reflect its revenue. There alaso does not seem to be any well planned product plan.
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