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Mellon Pressures CoSine for Sale

Light Reading
News Analysis
Light Reading
4/24/2003

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

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lastofthebohicans
lastofthebohicans
12/5/2012 | 12:09:55 AM
re: Mellon Pressures CoSine for Sale
With their cash position, Mellon estimates that
there is about $7.10/share in shareholder value.

I don't know much about these things. I'm curious
if this is a time to buy at current price
(~$4.50), if they are to be liquidated at
$7.10 a share?

There must be a catch.

-lotb
BobbyMax
BobbyMax
12/5/2012 | 12:10:17 AM
re: Mellon Pressures CoSine for Sale
Cosine during its early existence blew up a lot of money. I think the company was also involved in loaning money to its management employees. This created a lot of bitterness. The company does not seem to have much future.
nomad
nomad
12/5/2012 | 12:10:24 AM
re: Mellon Pressures CoSine for Sale
Here is a classic case of the bubble coming home to roost. The market (that's you and me) have valued this company at less than the amount of cash they have on hand. The only possible explanation is that the market (again - you and me) have so little faith in the company that we regard it as having negative value - either huge debt (I don't think this is the case) or no chance of doing anything but leaking cash.
Sayonara CoSine. The product may be cool, but the market doesn't exist.
steve
steve
12/5/2012 | 12:10:24 AM
re: Mellon Pressures CoSine for Sale
Risky strategy though - I imagine this pig trades in a very illiquid way, so trying to get out of any position without an M&A transaction will kill the stock. Also, it could take a long time to get control of the company - staggered board (?), etc. I suspect Mellon is already in so deep with their existing position they feel they have no choice but to go in deeper.

Like a shark, move forward, or die
skeptic
skeptic
12/5/2012 | 12:10:24 AM
re: Mellon Pressures CoSine for Sale
I don't get it. Why did these guys increase their position by 245,000 shares in the last two months if they're worried about "watching their investment deteriorate." Sounds pretty fishy, but I can't wait to see how this turns out!
=============
They increased their position because they want
to take over the company and get at its cash
assets. They see an unprofitable company
sitting on a whole pile of cash and they would
rather have the cash now than try and wait
out the economy (and watch the cash shrink
to nothing).

They also (rightly) suspect that the long-term
value of the company is probably less than its
cash in the bank. Even if things turn around,
the sale price isn't going to reach the level
they can get by seperating the cash from the
company.
Phiber
Phiber
12/5/2012 | 12:10:26 AM
re: Mellon Pressures CoSine for Sale
I don't get it. Why did these guys increase their position by 245,000 shares in the last two months if they're worried about "watching their investment deteriorate." Sounds pretty fishy, but I can't wait to see how this turns out!
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