Ephraim Fields of Echo Lake Capital Issues Letter to Independent Board Members of Edgewater Technology, Inc.
Ephraim Fields of Echo Lake Capital Issues Letter to Independent Board Members of Edgewater Technology, Inc. - Questions qualifications of Directors - Notes Directors have little relevant industry experience, but for some reason have extensive experience in the non-profit and marketing fields - Notes poor performance of certain Directors while at previous employers - Criticizes Board for poor performance, excessive compensation, and misaligned incentives - Notes longstanding underperformance of stock price - Cautions against using capital for an acquisition, especially considering failure to detect fraud during previous acquisition - Demands Board explore strategic alternatives to maximize shareholder value PR Newswire NEW YORK, Oct. 10, 2013 NEW YORK, Oct. 10, 2013 /PRNewswire/ -- Mr. Ephraim Fields of Echo Lake Capital today announced he had issued the following letter to the Independent Board Members of Edgewater Technology, Inc. (EDGW). In his letter Mr. Fields, among other things, analyzed the backgrounds of the Independent Board Members and raised questions about their qualifications to serve as Board Members. October 8, 2013 To the Independent Members of the Board of Directors: As longstanding shareholders of Edgewater Technology, Inc. ("EDGW" or the "Company"), we remain deeply concerned by your continuing failure to act in the best interest of all shareholders. As our previous letters have illustrated, EDGW's stock has repeatedly and significantly underperformed various benchmarks. One of many, glaring examples of this poor performance can be seen by reviewing EDGW's performance since Ms. Shirley Singleton became CEO on January 9, 2002. Since that day, almost 12 years ago, EDGW's stock has returned only 50%, while the S&P 500 has returned 83%, implying EDGW shareholders would have made almost 70% more money (and benefited from significantly greater liquidity) by investing in the S&P 500 instead of Ms. Singleton. We find this underperformance to be unacceptable and fail to understand why you do not as well. As our previous letters have also illustrated, during this time of dramatic underperformance, you have, shockingly, not only retained the services of both Ms. Singleton and other senior executives whom we believe have contributed to the stock's poor performance, but you have also provided them with increasingly generous compensation. Since several of you left your previous jobs prematurely, you hopefully understand that an ethical board of directors cannot continually reward poor performance. We also believe you have inexcusably failed to implement various initiatives that could have easily created immediate and significant long-term shareholder value. For example, you could have (i) more aggressively returned capital to shareholders (why does EDGW, after all these years, continue to retain so much cash?), (ii) put the company up for sale (why does this tiny, illiquid company remain public?), or (iii) terminated Ms. Singleton whose poor performance and excessive compensation (we believe) have hurt EDGW's shareholders and other stakeholders (how many other CEOs keep their jobs and get increased compensation after almost 12 years of repeated underperformance?). Perhaps you have been unwilling to implement shareholder-friendly initiatives because you are unwilling to do anything that might jeopardize the generous compensation you receive as members of EDGW's Board of Directors (the "Board"). Each of you is paid generously for your Board services. Last year alone your average compensation was $81,000, a 9% increase from the previous year. Obviously if EDGW was sold or Ms. Singleton was terminated, you would likely lose your generous Board compensation. Our concerns about your financial motivations are further heightened because most of you personally own very little stock, particularly in light of how many years you have each served on the Board. Consequently, your incentives do not appear to be aligned with those of EDGW's shareholders. Another possible explanation for your failure to act in shareholders' best interests is that you are simply unqualified to serve as EDGW Board members. After researching your backgrounds, we became deeply concerned because: o Most of you lack experience in industries that are relevant to EDGW. Amazingly, almost all of you have had careers in the non-profit or marketing industries, and we wonder how helpful that experience is in guiding a for-profit, IT consulting company like EDGW. o Collectively you appear to lack many skills critical to a well-functioning board including accounting, capital allocation, corporate finance, M&A, and strategic planning. o It appears that several of your previous companies did not perform well under your leadership. o Your average tenure on the Board is almost nine years, which suggests that, despite EDGW's historically poor performance, little effort has been made to recruit new directors who could add value to the Company. o Most of you have never served on the board of another publicly traded company. This is alarming because it suggests you may lack a basic understanding of how other public company boards function and how to best fulfill your fiduciary responsibility. o The two of you who do serve on the boards of other public companies both sit on the board of the same company. We often find such (unnecessary) board interlocking to be a sign of poor corporate governance and reflective of an "old boy's network," neither of which are good for EDGW shareholders. Below is a more detailed review of your backgrounds which we believe supports our concerns about your Board candidacy: Daniel O'Connell, age 64: o "Is an attorney and has substantial experience in real estate development, government relations and international business." o However, EDGW does not own any real estate, has limited international operations and does limited business with government agencies….so we wonder how helpful his background can really be to EDGW. o Currently serves as the president of a non-profit civic and educational association, which obviously faces vastly different issues than does a for-profit, publicly traded entity like EDGW. o Is an attorney, but we wonder when he last practiced law and if his area of specialty (which appears to be real estate development) is really relevant to EDGW. o Has not served on the board of any other public company. Nancy Leaming, age 66: o Has been an independent consultant for the past 8 years. o Prior to that she spent almost 20 years working at Tufts Health Plan, a non-profit health maintenance organization, where she was most recently president and CEO. o According to a published report, in June 2005 she left Tufts Health Plan "amid significant declines in membership and escalating operating losses." o Regardless of her performance at Tufts Health Plan, we wonder if her extensive experience at a private, non-profit entity is helpful to a publicly traded, for-profit entity like EDGW. o Serves on the board of two other publicly traded companies, Biogen Idec Inc. (BIIB) and Hologic Inc. (HOLX). Relative to EDGW, these companies operate in completely different industries, are significantly larger and face completely different strategic, operational and financial challenges. So, we question how helpful her experience with these other boards truly is to EDGW. o We find it troubling that she and another EDGW Board member both serve on the board of Hologic, Inc. and we are concerned about the ramifications of such (unnecessary) board interlocking. Paul E. Flynn, age 63: o Is a commercial loan officer at People's United Bank. o EDGW's Board supports his candidacy in part because of his "public company experience." However, the only public company experience he appears to have is as an employee of a public company. He is not on the board of his employer and it is unclear as a loan officer how senior he truly is within his own company. o He has not served on the board of any other public company…despite EDGW's Board's highlighting his "public company experience." Wayne Wilson, age 64: o Has been an "independent business advisor" for the past ten years. o Prior to that, he spent seven years working at PC Connection, Inc., a direct marketer of personal computers. His last position there was president, a role he held from March 26, 1998 until he entered into a "Separation Agreement" (with severance) effective September 30, 2002. During this time period, PC Connection's stock price declined over 70% and dramatically underperformed the S&P 500. o Regardless of his performance at PC Connection, we wonder if his experience at this direct marketing company is helpful to an IT consulting company like EDGW. o Serves on the board of three other publicly traded companies, ARIAD Pharmaceuticals, Inc. (ARIA), FairPoint Communications, Inc. (FRP) and Hologic, Inc. Relative to EDGW, these companies operate in completely different industries, are significantly larger and face completely different strategic, operational and financial challenges. So, we wonder how helpful his experience with these other boards truly is to EDGW. o We find it troubling that he and another EDGW Board member both serve on the board of Hologic, Inc. and we are concerned about the ramifications of such (unnecessary) board interlocking. Paul Guzzi, age 70: o Has served as the president of a non-profit entity for the past 17 years. o EDGW's Board supports his candidacy in part because of "his experience with other technology companies." However, it is unclear how much recent and relevant experience he has had with technology companies since he left his vice president position at Data General twenty years ago. o Has not served on the board of any other public company. Michael Loeb, age 57: o Is a private investor, builder, and operator of consumer marketing businesses. He co-founded a company that grew to become the largest seller of consumer magazine subscriptions in the US. He also served as consumer marketing director for Sports Illustrated and vice president of consumer marketing for Entertainment Weekly. o While he appears to have had a successful career, we wonder how his experience in the consumer marketing and magazine industries is helpful to an IT consulting company like EDGW. o EDGW's Board supports his candidacy in part because he "has extensive management and leadership experience in early-stage companies." o However, EDGW has been in existence for over 20 years and caters to Global 2000 companies, so we wonder why someone experienced with "early-stage companies" is really an appropriate Board member for EDGW. o Has not served on the board of any other public company. Considering the above listed facts, we think any reasonable person would have grave concerns about your qualifications to be EDGW Board members. We believe there are tens of thousands of people who are more qualified than you are to be EDGW Board members. Considering your questionable qualifications, EDGW shareholders should ask themselves why you were even asked to join the Board in the first place. We can only assume it was because Ms. Singleton wanted a Board which would "rubber stamp" her proposals as opposed to a Board which would act in the best interests of all shareholders. For many years you have personally enriched yourselves and lined your own pockets while EDGW shareholders have needlessly suffered. Your refusal to fulfill your fiduciary responsibility to act in the best interest of shareholders is reprehensible. We believe that other companies with whom you do (or hope to do) business with will become increasing aware of your failures at EDGW and elsewhere and will reassess their business relationships with you. Despite our disappointment with your performance, we believe you can easily redeem yourselves by immediately exploring alternatives designed to maximize shareholder value. If you do not, we will have no choice but to even more aggressively pursue our rights as shareholders, which will, among other things, result in you receiving even more unflattering attention. Finally, we caution you not to use EDGW's capital for an acquisition. You and senior management have proven to be highly inefficient at operating EDGW, so we have no reason to believe you will be more successful running an even larger company. Furthermore, acquisitions are inherently risky and we question your ability to identify and due diligence appropriate acquisition targets, especially since six months after you purchased Fullscope, you discovered fraud and embezzlement at the company. EDGW shareholders should ask themselves (i) why you failed to discover this fraud during due diligence and before the acquisition closed, (ii) whether EDGW overpaid for the acquisition in light of the subsequently discovered fraud, and (iii) whether EDGW will ever recover the millions of dollars that have been spent trying to recoup the embezzled money. We hope your response to this letter will be to finally do what is in the best interests of all shareholders. For your reference, the other letters we have sent to you and publicly released can be found at: o http://www.marketwire.com/press-release/ephraim-fields-echo-lake-capital-issues-letter-independent-board-members-edgewater-technology-1727857.htm and o http://www.marketwire.com/press-release/ephraim-fields-of-echo-lake-capital-issues-letter-to-ceo-of-edgewater-technology-inc-1753130.htm Sincerely, Ephraim Fields Contact: Ephraim Fields at (212) 259-0530 SOURCE Echo Lake Capital