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High Tech Takeovers In the Low Rent District
An Oregon entrepreneur sees value and stock listings in two young, struggling New Jersey companies.
With high-tech stocks in ruins, Douglas B. Spink sees deal opportunities all around him.
Spink is an entrepreneur addicted to deals. I am a deal junkie, says the 30 year-old Portland, Oregon-based CEO of Seedling Technologies. There is a certain excitement to a transactionthe tax issues, the legal matters and personalities. I couldnt let go [of] it. He extends a friendly hand first, and if that does not work, Spink hunts with an aggressive and even hostile approach. The result has often been battles with management. From his base on the West Coast, Spink has targeted New Jersey and its clutch of high-tech firms as a fertile hunting ground. He has been combing the state looking for both publicly traded and privately held companies that can be acquired on the cheap.
Two companies, Allendales Brighton Technologies, a designer of computer systems, and Jersey Citys GSV, an Internet incubator, have already felt the heat of his deal-making overtures. Both have resisted his moves, and battles for control are still going on. Among the attractions Seedling saw in both firms were their stock exchange listings, something he wants to have in hand to help raise financing for future deals.
With the market for initial public offerings of high-tech stocks all but shut down, Spink says he wants to carve out a non-traditional expansion route. Tactically, right now there really is no IPO window at all, he says, so it is not a choice between merging with a public company or taking the traditional route. The traditional route is shut down. The window is closed, as we say.
Seedling executed a reverse merger with Brighton last October and got a back-door entry to the stock market by picking up its over the counter listing. The combined entity now trades under the symbol SEED.
At the time of the merger, Brighton, which does much of its business in China, was performing poorly with its stock price hovering between $1 and $1.20. But after the deal, a rift developed between Spink and members of Brightons former management team. It prompted Spink to sue several of them last week in Superior Court in Bergen County seeking $11 million in damages for alleged misrepresentation and siphoning of company assets.
Seedling named Kit Kung, Brightons former CEO, Hong Yun, Kungs wife and a director, Alan Jurewicz, former CFO, and Easi-Link, a company founded by Kung, as defendants. Kit Kung, Jurewicz and Brightons attorney did not return phone calls seeking comment on the suit. But a former employee of the company at the Allendale office said the matter had been under legal dispute even before last weeks suit was filed.
After Brighton, Spink next turned his attention to Grove Strategic Ventures, GSV, which had a Nasdaq listing but was an inactive company with no revenues or projections.
In mid-January, Spink approached Jeffrey Tauber, CEO of GSV. GSV, based in Jersey City, was founded by Tauber in early 2000 after he closed his Internet retail operation, CyberShop.com, and refocused his strategy to fund Internet start-ups. He carried Cybershop shareholders with him to GSV.
Although GSV had invested in four early-stage Internet companies, pumping in between $100,000 and $1.5 million each, the investments were not generating any returns. GSVs shares had been trading below a dollar since last December. For the quarter ended September 30, 2000, it reported a net loss from continued operations of $651,000. Tauber made no investments in the latter part of 2000
Spink claims he first offered to buy out Taubers stake for about $1.6 million but was spurned as Tauber turned elsewhere for new investors.
Although GSV has since been delisted from Nasdaq for falling below its $1 share price minimum, Spink says he has not given up on the company and claims to have more cards up his sleeve.
About Seedling, Tauber says, As far as we can tell, they are a public company, but the public shareholders control less than 10% of the shares in the company … and there does not appear to be a meaningful public market for their shares. I am also very unclear about the level of cash they actually have in the company.
Spink, however, says he has $2 million on hand, recently raised from private investors. He certainly seems to be gearing up for more acquisition moves in New Jersey. Spink says he is now planning to either appoint a representative or create a satellite presence on the East Coast by merging with a company like GSV.
He has been talking with Dennis Cooper, the chairman of Franklin Township-based Global Access Investment Group, investment bankers and management consultants, about representing him here. Cooper founded InfoNet Holdings, another Internet incubator, last year, only to close it down in January because he could not attract enough capital to fund his projects. Cooper says he has already identified 14 public companies and about 30 private companies in New Jersey that Seedling can target. So what is Spinks game plan? Our role, he says is to step in as a catalyst at a critical juncture, take the hard actions that need to be taken, clean things up, restart growth and then hopefully find a buyer for whom the newly repaired asset is of strategic value.
Its not just New Jersey companies that are drawing Spinks interest. Last year, he also took a run at Philadelphia-based Stonepath (Amex: STG), another Internet incubator. Management there resisted him and the struggle ended with a settlement in February in which Stonepath agreed to invest $1 million in Seedling.
Earlier this year, Spink also made a pass at North Carolina-based C-Phone. Last month, C-Phone (OTCBB: CFON), a struggling maker of video communications systems. But last month its management also rejected Seedlings offer to acquire control of the company.
Barry Goldsmith, managing director of Red Bank-based Updata Capital, says it doesnt make a lot of sense to chase struggling public companies at a time when stock market sentiments are depressed. In a depressed market, there is not much to leverage from taking over a shell public company. It seems like being on the wrong side of the curve, he says. He also feels that it will be hard to integrate small public companies in a down market. On top of that, he says, the market is not interested in roll-ups and Internet incubators at all.
Such market factors and reasoning dont faze Spink. Fixing and selling is really central to what we do, he says.
Spink successfully launched a catalog company selling sports nutrition products and an e-commerce Internet incubator before he founded Seedling Technologies in 1998 with the aim of investing in early- stage technology companies. Seedling also targets small publicly traded companies with low valuations and either makes a minority investment or attempts an outright purchase of the company for its assets or for its synergy with other Seedling businesses. He says with the equity market being topsy turvy, he is able to buy prospects for very favorable prices. Two years ago, it was a sellers market. Now it is a buyers market and we like being one of the few buyers with experience and knowledge, he says.
But first Spink has some cleaning up to do. Seedling first has to straighten out its legal disputes with Brighton in order remain a viable public company with marketable shares.
According to Spink, Seedling became interested in Brighton last year after a representative of some of Brightons larger shareholders approached him to help boost the stock price. By that time, says Spink, the company was all but dead. It had made no Securities and Exchange Commission filings in 2000. Its last financial statements filed with the SEC show it had a loss of $2.5 million in 1998. In last years reverse merger deal, Seedling shareholders got a majority stake in the new firm with Brighton stockholders getting a minority share.
By December, Kung and his CFO, Alan Jurewicz, resigned from Brighton with Kung owning about 5% of the new company. Spink and Seedling President Paul Peterson were appointed chairman and president, respectively, of the new company, with Spink owning just over 50% of the shares.
Thats when the trouble started. Spink claims thats when Seedling requested Kung and his team to hand over records of the assets and properties of Brighton. They didnt cooperate, Spink says. He also says, and alleges in his lawsuit, that Kung and Jurewicz wrongfully siphoned off properties that belonged to Brighton to enrich themselves. This is the worst case scenario, says Spink, who concedes that he didnt do adequate due diligence. Sometimes you dont have the opportunity to do that. This one caught me off guard. At GSV, Tauber had already been under scrutiny from shareholders who felt he let them down when the company was CyberShop by projecting bright prospects when in fact it was incurring losses. Shareholder class action lawsuits against Tauber and CyberShop.com alleging misinformation and insider trading are still pending in federal court in Newark.
According to Spink, when Seedling approached Tauber about a possible business alliance, Tauber suggested that Seedling acquire his stake in the company (about 377,000 shares, representing around 18%) for $4 each, a deal that would have had a value of $1.5 million and would have paid a substantial premium for GSVs shares, which were trading around 70¢ at the time. Spink claims the proposal was that Tauber and his board of directors would resign, allowing Spink and his team to take over the company. After several permutations and combinations in the deal-making process, including one in which Seedling offered to acquire 400,000 shares in the company at $4 a share, a $1.6 million deal, Tauber terminated the negotiations on February 7.
Spink says Seedling was pushing hard to get a deal done since GSV was already on Nasdaqs delisting watch list. The company had until March 8 to shore up its share price to $1 if it were to remain listed. Although the shares closed at exactly $1 on March 8, the momentum could not be sustained. GSV was delisted from Nasdaq and now trades on the OTC Bulletin Board under the symbol GSVI.
But a week earlier, Tauber had found a new investor, Brooks Station Holdings, a Delaware company, which paid $400,000 in cash to invest in a newly created class of GSV 12% convertible preferred stock. Brooks Station also acquired an option to purchase an additional $300,000 worth of GSV stock at $1.10. Including that option, Brooks will have about 37.5% equity in GSV.
Tauber says he simply found Brooks offer better than Seedlings.
But Spink believes the Brooks deal amounts to an anti-takeover move and he says Seedling will continue to pursue GSV. The company, he says, is sort of in Seedlings businessinsofar as GSV is in any business at all.
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