Mellon Pressures CoSine for Sale
Two days after CoSine Communications Inc. (Nasdaq: COSN) announced its dismal first-quarter earnings and got a tongue-lashing from investors, Mellon HBV Alternative Strategies LLC, the company’s largest institutional investor, turned up the heat in demanding the company put itself up for sale or liquidate its assets (see CoSine Investors Lash Out).
Today, the investment firm filed its second Schedule 13-D with the Securities and Exchange Commission (SEC) regarding this matter (see Mellon Pushes for CoSine Sale).
“In response to our conversation on April 23rd and the extraordinarily disappointing earnings call on April 22nd, we are now demanding, rather than merely suggesting, that CoSine hire a financial advisor for the purpose of selling the company,” says the letter filed with the SEC today. “This option should have been explored over three months ago. As shareholders of over 5 percent of the company's common shares, we feel compelled to protect our investment.”
The letter, signed by William F. Harley III, chief investment officer for Mellon, accuses the company’s board of directors of breaching their “fiduciary responsibility to shareholders by allowing management to embark on such a high-risk strategic plan rather than seeking alternative options.”
Specifically, the company is asking that CoSine retain an investment banker prior to the May 6th annual shareholder meeting. Mellon says it has heard from reliable sources that a number of companies are interested in CoSine’s assets and technology.
“We feel that each of these should be explored thoroughly.”
If the sales process is not underway by May 6th, Mellon says it will seek stockholder consent to remove one or more members of the board of directors and to replace this person or persons with individuals supported by the investors.
The firm has also asked for a commitment from CoSine that if the company isn’t successful in finding a buyer by the end of July 2003, it will agree to liquidate its assets.
According to the most recent quarterly earnings, CoSine has $8.67 per share in cash and short-term investments. Mellon calculates that if the company liquidates the assets by the end of June, shareholders will still get $7.10 in cash per share.
“We cannot ignore the fact that recouping $7.10 per share under a liquidation scenario is far more attractive than watching our investment deteriorate under the company's current plan,” says the letter.
Over the past 60 days, Mellon has been trying to strengthen its position by buying up additional shares in the company. Since February 21, 2003, the firm has bought over 355,000 shares. As of the close of trading on April 23, 2003, the firm owned over 600,000 shares of the common stock, representing approximately 6.36 percent of the outstanding common stock of the company, based on the number of shares outstanding as of March 14, 2003.
“I’ve never seen anything like this before,” says Joanna Makris, an analyst with Adams Harkness & Hill. Makris, one of the only analysts still covering CoSine, says that the company has a viable product, but she says there are other factors at work.
“At the end of the day, it’s all about timing,” she says. “The economic environment could be too much for a niche player like CoSine to bear.”
Makris says that regulatory uncertainty has played a significant role in service providers’ hesitation to deploy IP service and aggregation gear, such as CoSine’s.
“With only $2.2 million in revenues this quarter, it remains to be seen if they will be able to achieve a $20 million a quarter run rate to break-even,” says Makris.
CoSine did not return calls for comment by press time. This afternoon, the company’s stock was trading up $0.51 (11.46%) to $4.96.
— Marguerite Reardon, Senior Editor, Light Reading