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Some thoughts on the SODI Solitron proxy fight

February 27, 2013 | About:
whopper investments

whopper investments

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I’ve mentioned Solitron (SODI) multiple times on the site, most recently here. While the stock is no longer a net cash bargain, they have bought back a decent amount of shares and are still extremely cheap, especially once their NOLs are taken into account.

Last week, the Furlong fund sued the company to hold an annual meeting with an intention to nominating a bunch of new directors. Ragnar had a nice summary of the situation, but I wanted to add my two cents to what’s going on.

First, I think there are some positives. I think the board could definitely use a bit of fresh blood, and anything that would push them towards making an acquisition to utilize their NOLs or repurchasing shares has to be considered a good thing. I also wouldn’t mind if the potential proxy fight forced them to exercise all of their low priced options and put a bit more cash on the balance sheet.

However, I do have a big problem with the nominating slate. From memory, the CEO owns roughly 30% of the company. Furlong fund owns less than 1%. The own a bit more than me and some other small shareholders I’ve talked to. Their proposal calls for them to replace all of the board except for the CEO with their own nominees. Effectively, they will have taken over the company. I don’t understand how a fund that owns less than 1% of shares thinks they deserve to control the company and the board more than the CEO who has 1) built this business over the past 30 years and 2) has the most incentive to create shareholder value, given he’s the largest shareholder.

I also have some issues with their nominees. Ryan Morris is a fine nominee, though I have heard some quibbles with his track record. I also wonder, given he’s running a fund and the chairman of two other much larger companies, how much time / value he could really add.

I like Steven Kiel from my brief interactions with him on twitter, but from reviewing some of his presentations and articles on seeking alpha, it seems he spends much more of his time in the large and mid cap space than in a nano-cap like Solitron. He also doesn’t have much (any?) board experience or management experience, though I think that’s fine for a microcap like Solitron- it’s not a terrible thing to bring someone with a solid value investor perspective on to the board of a company that has a lot of untapped levers for value creation.

My biggest problem, however, is their last nominee. Derek Cash is currently in the marines and a part time law student, and he seems to be a career military man (no business experience). I have tons and tons of respect for the military, but I don’t see how that qualifies him to serve on Solitron’s board here. Instead, the nomination makes it seem like Furlong is nominating their friends rather than people who can actually add value to Solitron.

I also question the timing. The background of the proxy reads as follows

On July 9, 2010 Mr. Rudewicz spoke with CEO Shevach Saraf on the phone. During the conversation, Mr. Rudewicz discussed several items with Mr. Saraf including environmental liabilities and the Company's market valuation at or near the value of its cash and treasury accounts. On January 13, 2013 Furlong Fund filed a Delaware General Corporation Law ("DGLC") Section 211 motion ("211 Request" or "211 Matter") to compel an annual meeting in the Delaware Chancery court because after almost three years as a shareholder and having read various accounts of other shareholders on financial websites, the Company still has not had an annual meeting to elect directors in over ten (10) years.
The background makes it seems like he had a conversation during the middle of 2010, no further contact, and then filed a lawsuit almost 3 years later. That seems a bit off, right? No contact for three years and then just slapping them with a lawsuit?

To wrap this up, I would love to support some new blood on the board. But I absolutely can’t do it in this form. If Furlong would change their proposal to nominating only one or two directors (even two is pushing it given their small ownership), expanding the total board size to six or seven, and then having the CEO nominate another two or three with solid business experience, I would wholeheartedly support the proposal. If they want more seats, then I say buy more shares! If they had 10-15% of shares, then I think we could start talking about them getting 3 out of seven directors. Finally, if they put a hold on the lawsuit for another month or two to give the company some time to arrange an annual meeting and avoid unnecessary legal costs…. even better.

Disclosure- Long SODI


Rating: 2.8/5 (4 votes)

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