Whenever a merger I’m interested in is announced, the first thing I do with the solicitation is go straight to the “background” section. I find reading the history and motivations behind the merger always makes for fascinating reading. So when the merger for GTSI came out, I naturally immediately turned to the background section. And boy, I was not disappointed.
First, some history- GTSI had been one of my largest holdings for the past year or so. I’ve believed for a while (and continue to believe) that management destroyed a huge amount of shareholder value in the past few months (through a dirt cheap sale of their Eyaktek stake, an acquisition at a ridiculous multiple hile their stock traded for less than half of book, and a refusal to buyback shares during the half year when their stock traded well under cash value), so I was relieved to see the company was finally selling itself, even though I wondered if the sale was too cheap.
With that in mind, the background made for some very interesting reading. Five different firms made offers for or serious inquiries into GTSI in the past 18 months- EyakTek, Bidder A & B (private equity firms), Strategic Party A, and Unicom, the ultimate buyer. Of particular note, Bidder A was involved in consistent due diligence from September until two days before the merger was announced, constantly offering $7.50 per share. The proxy does not state specifically that Bidder A ever withdrew from the bidding or said the price was too high; rather, it seems Unicome reached a definitive agreement w/ GTSI and the board grew sick of waiting.
So Bidder A seems to be clearly still in play. And the company is actively reaching out to other buyers during their 30 day go shop period:
Beginning on May 7, 2012, the day of the execution of the Merger Agreement, at the direction of the GTSI Board and under the supervision of the Company’s executive officers, representatives of Raymond James began the process of contacting parties to determine whether they might be interested in pursuing a transaction that would be superior to the proposed transaction with Parent. Representatives of Raymond James contacted 51 parties, consisting of 29 potential strategic buyers and 22 potential financial sponsor buyers.
As of May 18, 2012, none of the parties contacted during the go-shop process, on behalf of the Company and at the direction of the GTSI Board, had submitted an acquisition proposal for the Company. The process for the solicitation of other third party interest is ongoing, although there can be no assurance that such efforts will result in an alternative transaction being proposed or in a definitive agreement for such a transaction being entered into. The Company does not intend to announce further developments with respect to the solicitation process until the GTSI Board has made a decision regarding an alternative proposal, if any.
To me, that statement seems to hint that the board is actively engaged with several potential buyers.
Now, I’ve detailed before why I think there’s potential for a higher bid: the company is selling itself for a fraction of book value and less than NCAV, as well as effectively completely writing off the $15m acquisition they did just six motnhs ago!!!! Their business would also seem to be very attractive to PE firm, given the prevalence of tons of high quality government accounts receivable to be borrowed against and stability of cash flows in the absence of government sanctions!
As a reminder, betting on a higher bid is inherently speculative, and I doubt a higher bid would come in drastically higher than the current one. I’ve also sold a good deal of my shares into this initial offer to lock in a profit. However, I continue to hold some shares for two reasons: 1) (obviously) the possibility of a higher bid and 2) the spread, while small in the absolute at ~0.75%, offers a decent annualized yield of over 8% given the deal is scheduled to close in a month.
Disclosure: Long GTSI
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