From the Wires
Pergament Advisors, LLC requests that Overland immediately explore strategic alternatives to maximize shareholder value
By: PR Newswire
Nov. 19, 2012 09:30 AM
NEW YORK, Nov. 19, 2012 /PRNewswire/ -- The following is a letter from Pergament Advisors, LLC to the Board of Directors of Overland Storage, Inc.
November 16, 2012
Overland Storage, Inc.
Board of Directors:
Pergament Advisors, LLC is the investment manager of Pergament Multi-Strategy Opportunities, LP ("Pergament") that owns a significant economic interest in Overland Storage, Inc. ("Overland" or the "Company"). Based on publicly available information Pergament is a top 10 shareholder.
Since Eric Kelly became CEO in 2009 the Company transitioned from an OEM strategy to a branded products company providing a full suite of storage systems including disk-based network attached storage (NAS), storage area network (SAN), tape-based back-up and archival solutions as well as data management software. An article this year stated, "Overland is the only company that now has scale-out NAS, scale-out SAN (Block), VTL, and tape." (1)
Excluding the earnings report released November 14th where management stated revenues were pushed-out by European challenges, we believe the Company reached an important inflection point of trough revenue a year ago when Overland began their new product launch. In October 2011 Overland launched its SnapServer DX product followed by SnapSAN and recently the new scale-out NAS solution SnapScale (Cloud). We applaud management's efforts building a higher margin branded product business with accelerating growth potential from the new baseline. Unfortunately, Overland is misunderstood and the stock is grossly undervalued.
The market resists giving value to Overland's successful turnaround and current high growth and margin expanding profile. At current market capitalization and adjusting for the six capital raises (2) during Eric Kelly's tenure as CEO there has actually been a loss in value. The Company raised approximately $45 million (2) meanwhile the current market capitalization is approximately $35 million. Considering the Company was trading at around a $10 million valuation when Eric Kelly became CEO in January 2009 there has been an implied loss of $20 million. This we do not applaud. However, we believe market misunderstanding has driven this value dislocation and, fortunately, this can be easily reversed.
Eric Kelly has experience buying and selling businesses with the most relevant transaction he led being the 2002 purchase of Snap Appliances from Quantum for $10 million. He then led the sale of that business approximately two years later to Adaptec for $100 million. We applaud that return profile and believe a similar scenario will occur with Overland if the Board takes the right actions.
Pergament requests that Overland immediately explore strategic alternatives to maximize shareholder value.
Overland is significantly undervalued and we believe the time has come to sell the Company to a strategic buyer. Considering the capital raised since 2009 represents more than the current market capitalization we believe the largest shareholders, especially those who were financing participants, support our view. Most of the financing participants were hedge funds and according to public filings and Bloomberg the ten largest hedge fund holders own approximately 67% of the common stock. Since the financing rounds ranged from $1.25 to $2.64 with a weighted average of $1.93 (2) all of these investors are currently under water and thus we believe would most likely support maximizing shareholder value now.
Our conviction is heightened by the last Annual Shareholder Meeting held on June 12, 2012 where the Chairman of the Board, Scott McClendon, maintained his position by only a slim margin (3). This occurred without any publicized shareholder hostility going into the meeting. Since Mr. McClendon was a past CEO of Overland and is the longest serving board member its clear shareholders desire change to the status quo. Since hedge funds own the majority of the Company we believe further change to the status quo, if demanded, could easily occur. It is also important to note that the Clinton Group ("Clinton"), a known multi-strategy fund with activist strategies, is the third largest shareholder with 12.5% and holds a board seat. After studying their publicly filed letters to various Board of Directors demanding value creation we believe Clinton's views are aligned with ours and all other shareholders.
Overland is worth at least $3.50 to an acquirer representing at least a 200% premium.
Based on 2012 calendar year revenue consensus of $60 million Overland currently trades at 0.5x, which is a significant discount to historical acquisition multiples in the storage sector. Storage acquisitions on average have been well in excess of 2x revenue with several well known transactions at 10x. A low end range of 2x-4x revenue represents an Overland valuation of $120 million to $240 million or fully diluted price per share of $3.50 to $6.00. At November 15th close of $1.20 the range represents premiums of 200% to 400%.
Revenue and cost synergies to a strategic buyer give credence to the higher end of the range. We believe cost synergies drive tremendous value to an acquirer. Overland's annual operating expenses are approximately $35 million, which is primarily represented as of June 30, 2012 by headcount of 79 in sales and marketing, 33 in research and development, and 25 finance/IT/HR (there are only 184 total full-time employees). To put that in perspective, a mid-size technology company in the storage space, NetApp, has headcount of approximately 5,500 in sales and marketing and 4,000 in research and development as per the 2012 10K Filing. We believe all of Overland's operating expenses would be redundant to a strategic acquirer increasing the attractiveness of Overland as a target. Based on 2012 calendar year revenue consensus of $60 million, 33.7% gross margin (most recently announced quarter), and $35 million of cost synergies (the acquirer absorbing zero operating expenses) the "new" Overland would generate $20 million of operating income equating to operating income multiple range of 6x-12x based on the acquisition revenue multiple range of 2x-4x. This is extremely attractive.
We, therefore, believe the high end valuation compares favorably to historical transactions. Adding to the conviction is that the analysis EXCLUDES the revenue synergies a larger sales force would realize AND the gross margin expansion a larger company's manufacturing and sourcing scale would drive. The analysis also EXCLUDES the value of the patent portfolio, which is potentially significant.
We applaud the Company's November 2011 settlement with Dell and IBM in its patent infringement lawsuit against BDT, IBM, and Dell. We also applaud the Company's announcement in June 2012 claiming infringement of one or both of the Overland patents ('766 and '581) involved in the International Trade Commission ("ITC") case against BDT. Those lawsuits name as defendents: Quantum, Spectra Logic, PivotStor, Qualstar, Tandberg, Tandberg Data, and Venture Corporation.
We believe the combination of the settlements with two of the largest global technology companies plus the ITC's recent determination of '766 and '581 patent validity that Overland possesses a strong case against all defendents in US District Court of Southern California. The breadth of the valid patents equates to significant monetization potential especially with patent '766 (partitioning) spanning the entire storage industry.
Even though Overland's current market capitalization provides no value to potential settlements and royalties, we believe all industry players would be interested in owning these patents. There is tremendous competitive value for a large strategic acquirer to own valid patents that span the storage industry. We believe the acquirer would have greater litigation experience and financial wherewithal to strongly pursue the pending cases and conceivably add additional defendants. It should also be clear that all current defendents could be buyers of the patents or interested in acquiring Overland. Any value gained by an acquirer from Overland's patent portfolio would increase the acquirer's return, which adds to our belief that the high end valuation compares favorably to historical transactions.
It should be clear that right now is a very compelling time for the Board of Directors to maximize shareholder value and that Overland is a very compelling target to many strategic acquirers. We request that Overland immediately explore strategic alternatives to maximize shareholder value.
We are available to discuss our views further at 212-994-6240.
Steven J. Brown
(1) Seeking Alpha. February 28, 2012
(2) As per Company news releases and public filings. $3.8 million announced October 30, 2009 at $2.10; $12.0 million announced February 22, 2010 at $2.64; $4.2 million announced November 12, 2010 at $1.25; $3.0 million announced December 21, 2010 for ownership interest in the BDT / IBM / DELL litigation; $15.2 million announced March 16, 2011 at $1.77; $6.4 million announced March 22, 2012 at $2.00
(3) 6,625,904 votes FOR and 6,187,528 votes WITHHOLD. As per Form 8-K dated June 18, 2012
CONTACT: Steven Brown 212-994-6240
SOURCE Pergament Advisors, LLC
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