Wednesday, October 18, 2006


Raw Deal for Vodavi Shareholders

The portfolio continues to march ahead, gaining 0.1 percent yesterday and another 0.3 percent today. Most of today's gain was due to Vodavi (VTEK), which popped up 8 percent in the last 30 minutes of trading. Then, shortly after the market closed, Vodavi announced that they will be acquired by Vertical Communications. Both Vodavi and Vertical surged in the last half hour of trading on high volume, in Vertical's case by 40 percent. It appears that someone got wind of the transaction before the press release was disseminated to the public. If that's the case, then someone broke the law and should go to jail.

Aside from the apparent insider trading, there is the matter of the deal itself. Vertical Communications is an unprofitable BB stock. What's more, Vodavi never bothered to announce to the public that it was interested in being acquired nor, as far as I can tell, to hire an investment bank to market the company. All we got is a "fair value" assessment, which in my opinion, is worth little more than the paper it is written on. Given how much money there is in private equity these days, I think if Vodavi had actively marketed itself, it could have gotten $10 per share for shareholders. That's my fair value assessment.

How will this play out? On the positive side, this is an all cash transaction and Vertical has already lined up the financing for the deal, so it's highly likely that Vodavi shareholders will get at least $7.50 per share. Hopefully, however, now that the deal has become public, a competitor or private equity fund will step in and offer a sweeter offer to shareholders. I wouldn't hold my breath on this, but I do think there is a reasonable probability (maybe 25 percent) that it will happen.

I couldn't agree with you more on VTEK. Its sale value should be considerably greater than $7.50. Heck, I always felt one of the reasons they traded at a discount to their reasonable valuation was b/c of their relationship with LG-Nortel (who own over 30% of VTEK). LG supplied over 90% of VTEK's hardware, and as I understand it their agreement does not allow VTEK to shop for other suppliers. In their 10K's they always state that a sale of the company is likely to be impeded due to their relationship w/LG.
But now that LG-Nortel have agreed to sell their shares, the intrinsic value of VTEK is untethered by this relationship, and the sale price should reflect this. I realize its a pittance in the large scale view for LG and Nortel, but I would think if they agree its time to monetize their holding in VTEK, LG and NT could easily spread the word around to find a buyer at a higher price and get a greater return on their investment.

When it comes down to it, I'd rather hold VTEK than sell at $7.50. Even if VTEK has a bad quarter or two, I'd be confident that I could make more money trading VTEK over the years than I'd be making on this one-off.

I'll vote no, but it won't do much good.

Good luck.
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