Mellon Hires Banker for CoSine

CoSine Communications Inc. (Nasdaq: COSN) shareholder Mellon HBV Alternative Strategies LLC has hired an investment bank to help it find a buyer for CoSine, according to a filing made today with the Securities and Exchange Commission (SEC). Mellon, a hedge fund group within Mellon bank, now owns about 6.7 percent of CoSine. It has spent several months looking at ways to increase the value of the five-year old equipment vendor.

The SEC filing states Mellon is reserving its right to pursue a change of control of CoSine's board of directors, but it hasn't yet called for a proxy vote (see CoSine: Not Ready to Sell and Mellon Pressures CoSine for Sale).

CoSine, whose customers include NTT Communications Corp., Sprint Corp. (NYSE: FON), and Cable & Wireless (NYSE: CWP), reported a net loss of about $94 million on revenues of about $24 million in 2002. The company had about $84 million in cash and investments as of March 31 but only carries a market capitalization of about $62.2 million.

Mellon hasn't said what it would ultimately like to do with the company. Of course, the motive for hiring a banker could be to raise the share price by increasing the hope that there's a buyer (see Green Gooses AFC). More likely, though, is that Mellon will gain control of the company, take it private, and then sell the company to an equipment vendor in need of its IP services systems, CoSine investors say.

Less likely, says a CoSine shareholder, is that Mellon will force a liquidation of the company in order to return cash to its shareholders. That source says Mellon sees a potential for CoSine's technology in the market and feels it can get more money for it. Mellon would do this, the source says, by first paying off shareholders with its own tender offer and then selling the company to an interested equipment maker.

CoSine's next move, according to sources, will be to hire its own investment banker to protect the interests of its venture capital investors, who likely paid a premium for their CoSine stakes. During the company's most recent earnings conference call, CoSine CEO Steve Goggiano said he does "pursue and interact with investment bankers" on a daily basis. "We discussed options, opportunities, we share those officially with the board... That's what we will continue to do." (See CoSine Investors Lash Out.)

So far, Mellon has declined to comment, and it hasn't revealed which banker it hired. Though it said on CoSine's conference call that it has talked to several companies that would be interested in buying CoSine, it hasn't released a list of possible suitors.

CoSine did not return calls for this article.

— Phil Harvey, Senior Editor, Light Reading

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