Ephraim Fields of Echo Lake Capital Issues Letter to
Ephraim Fields of Echo Lake Capital Issues Letter to Independent Board Members of Edgewater Technology, Inc.
NEW YORK, NY -- (Marketwire) -- 11/19/12 --
-- Demands Board explore strategic alternatives to maximize shareholder value -- Stock declined by 55% from 2007 to 2011 -- Stock underperformed peer group by 89% from 2007 to 2011 -- $39 million of shareholder value destroyed while top three executives received $8.6 million of compensation -- Cash represents 33% of equity market capitalization -- Independent Directors highly compensated but own little stock
Mr. Ephraim Fields of Echo Lake Capital today announced he had issued the following letter to the Independent Board Members of Edgewater Technology, Inc., which is traded on the Nasdaq Global Market Exchange.
November 19, 2012
To the Independent Members of the Board of Directors:
While it is generally our strong preference not to publicize such letters, our private conversations with various parties combined with your longstanding, questionable track record have compelled us to go public. Simply put, we have grave concerns about your willingness and/or ability to fulfill your fiduciary responsibility to act in the best interests of shareholders. Over many years, the stock price of Edgewater Technology, Inc. ("EDGW" or the "Company") has significantly underperformed on both a relative and absolute basis and tremendous shareholder value has been destroyed. During this time, we have seen EDGW's Board of Directors (the "Board") do very little to enhance shareholder value. In fact, we believe many of your decisions (including those related to management compensation and capital allocation) have contributed to the tremendous destruction of shareholder value. As a result of these and other factors, we believe EDGW's shareholders would be best served if the Board were to immediately hire a reputable investment bank to explore strategic alternatives designed to maximize shareholder value. We would anticipate that such alternatives would include returning a significant amount of capital to shareholders as well as selling the entire company.
Despite EDGW's strong underlying business, the performance of the company's stock price has been abysmal. From 2007 to 2011, EDGW's sto ck price declined by a staggering 55%. Even worse, this decline occurred during a time when the benchmark indices appreciated significantly, resulting in EDGW underperforming its New Peer Group by 89%. As illustrated below, EDGW's stock price has a history of significant underperformance.
Total Return: 2007 - 2011 2009 - 2011 ------------- ------------- EDGW -54.8% 6.6% New Peer Group 34.4% 105.1% S&P 600 IT Services 48.7% 77.8% EDGW Over/(Under)Performance Versus: New Peer Group -89.2% -98.5% S&P 600 IT Services -103.5% -71.3%
When a company underperforms so significantly and over such an extended period of time, often the board will replace the company's CEO. You, however, took an atypical approach and not only decided to retain the CEO but also to generously compensate her. From 2007 to 2011, during a time when EDGW's stock declined 55% and approximately $39 million of shareholder value was destroyed, you rewarded Ms. Singleton total compensation of $3.0 million and EDGW's top three executives (including Ms. Singleton) total compensation of $8.6 million. Not only does this compensation seem excessive considering EDGW's poor performance, but it seems quite large for a company as small as EDGW. To put this into perspective, we note that in 2011 the compensation of these three executives equaled 165% of EDGW's pretax profits. In light of these various data points, we fail to understand how any credible board can justify such compensation.
We believe one of the reasons EDGW's stock has so dramatically underperformed has been the Board's poor capital allocation. EDGW generates significant free cash flow, in part because of its attractive business model, limited capex requirements and sizeable NOL. For many years, the Company has retained a significant amount of cash. Despite maintaining such high cash balances, management has failed to clearly articulate any likely uses of this excess cash, besides the occasional stock buyback. Currently, net cash equates to 33% of EDGW's total equity market capitalization, which seems exceptionally high to us. In fact, EDGW has significantly more net cash as a percentage of its equity market capitalization than almost every member of its New Peer Group. We fail to understand why the Company retains so much cash and we believe shareholders would be far better served if the Company returned a significant amount of capital to shareholders.
Given EDGW's historical underperformance, we wonder why the Board has not been more proactive in attempting to create shareholder value. Most of you have been on the Board for over six years and you are all well compensated for your service (your average Board compensation was over $74,000 last year). However, despite your combined 45 years of Board service, you collectively only own approximately 87,000 shares of stock (excluding options you were given by the Company). Considering your questionable track record, we wonder if your lack of financial investment in EDGW (aka your lack of "skin in the game") limits your incentive to act in the best interests of EDGW's shareholders. As shareholders, we would expect more from you, especially considering your combined total compensation last year was almost $0.5 million (which equates to 37% of EDGW's 2011 pretax income).
EDGW is an illiquid, microcap company whose stock remains undervalued and has historically underperformed. The company has failed to attract interest from the investment community and we doubt the company will ever achieve a fair valuation in the public markets. In addition, the company has no need to access the capital markets. In light of all these factors (as well as others that we have chosen not to mention at this point), we wonder why EDGW continues to expend relatively high costs to remain publicly traded when the company's shareholders receive very little benefit from it.
We believe there are parties who would be interested in acquiring EDGW at a significant premium to its current stock price. Considering EDGW's overcapitalization, excessive corporate overhead, and relatively high public company expenses, we believe an acquirer can create significant value for EDGW shareholders... something you have largely failed to do. Importantly, we believe that an acquirer would likely be interested in retaining most of EDGW's consultants.
Our sole objective is to create long-term shareholder value for all EDGW shareholders. EDGW's stock has been and continues to be undervalued. Based on your track record, we have grave concerns about your ability to and/or interest in creating shareholder value. Therefore, we call upon you to immediately hire a reputable investment bank to explore strategic alternatives designed to maximize shareholder value. We would anticipate that such alternatives would includ e returning a significant amount of capital to shareholders as well as selling the entire company.
No doubt you can attempt to refute this letter with irrelevant information, vague promises, personal attacks or anti-takeover measures. However, we hope you won't waste even more of shareholders' money by doing so since we believe the evidence is clear and your shareholders are becoming increasingly frustrated. We believe EDGW's Board has, over an extended period of time, failed to fulfill its fiduciary responsibility. Under your watch, EDGW's shareholders have suffered while you and EDGW's top three executives have benefitted.
We hope your response to this letter will be to finally do what is in the best interests of all shareholders. As always, we can be reached at (212) 259-0530 or email@example.com.
Ephraim Fields (212) 259-0530 firstname.lastname@example.org