Tuesday, March 31, 2009 0 comments

An M&A deal to consider: En Pointe Technologies (ENPT) management buyout

The En Pointe Technologies (ENPT) management buyout seems like an attractive M&A arbitrage position to consider, except for one thing. Management is offering to buy out the company for $2.50 per share and given the current stock price, it offers a 21% return. The deal is expected to close in the 2nd quarter of 2009.

The balance sheet looks clean, assuming it can be relied upon. It has almost no debt and actually has cash equal to almost 2/3 of market cap. However, it seems to have posted a massive loss in the 4th quarter of 2008.

This is a microcap with a market value of around $15 million.

What's Not to Like?

As I said, everything looks good except for one thing. The exception comes from the possibility that this may be a shady company with dubious ethics. Reading the Yahoo! Finance message boards, one gets the impression that some investors, or at least one investor, is disgruntled and thinks this is a near-fraud.

En Pointe Technologies seems to have had problems conforming with Sarbanes-Oxley earlier this year:


...it has received a notice from the Nasdaq Stock Market ("Nasdaq") on January 5, 2009 indicating that the Company is not in compliance with Nasdaq Marketplace Rule 4310(c)(14) because it did not file in its Annual Report on Form 10-K (the "Periodic Report") for the year ended September 30, 2008 a completed management report on internal controls over financial reporting. As was stated in the Company's recently filed Form 10-K, the Company was unable to complete the evaluation of its financial and information technology controls due to limited resources.


The company did file a response outlining steps it is taking to rectify the caution from NASDAQ.

The fact that management announced a buyout so soon after the NASDAQ warning seems a bit fishy. If someone wanted to hide something, the easiest way would be to take the company private. Yet, it is also possible that they decided to take the company private for legitimate reasons. Conforming to Sarbanes-Oxely and other NASDAQ regulations is expensive so they may have wanted to avoid it all at once. They are also buying out the company at a reasonable price--a huge premium from where it was trading but not a good deal for investors who have owned this company for more than an year.


Conditions of the Buyout

Here is the press release announcing the deal, along with some details:

The merger agreement contains customary representations, warranties and covenants made by the Company, including covenants that the Company will run its business in the ordinary course of business consistent with past practice and will refrain from taking certain actions between the date of the merger agreement and the date of closing of the merger. The transaction is subject to obtaining regulatory approvals and other customary closing conditions, including no material change in the Company's representations and warranties prior to closing, the Acquiror's ability to obtain sufficient financing (a debt financing commitment letter having been obtained) and holders of not more than ten percent of the Company's outstanding common stock seeking appraisal rights of their shares. The transaction is subject to the approval of the merger agreement by the holders of a majority of the outstanding shares of the Company's common stock as well as the holders of a majority of the outstanding shares of the Company's common stock held by the Company's disinterested stockholders (e.g. stockholders other than the Acquiror and Mr. and Mrs. Din and their family).


Usual stuff. A shareholder vote, requiring 50% of non-affiliated owners, is pending. Financing seems ok, with GE Capital indicating that it will finance the deal (although this can fall apart if they discover accounting problems or other issues.)

As usual, anyone really interested should check the SEC filings as well, particularly the proxy (here is the preliminary one).

Will Keep An Eye On It

I'll be watching this and may make an investment. If don't gain further confidence in this company, I will limit any investment to a small amount. Last year, I said that large arbitrage spreads was likely due to panic selling and the exit of many professional arbitrageurs. This year I don't believe that is the case (credit isn't as tight and anyone that can't play the game is out and won't be coming back.) So a 20% spread, like here, implies real risk. However, some of the spread is because it is a microcap and hence unavailable for professional arbitrageurs (a typical pro can literally buy the whole company, $15 million worth, with less than 10% of their portfolio.) I do notice that the price has been drifting slightly downards from the annoucement date and I'm not sure why.

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