By Elizabeth Kopple
Microcap investors know that their exit strategies are limited when they make a sizable investment. Trading volume is usually low so it is difficult to sell without driving down the price. Volume is often too low to allow hedging through an options market. When management fails to create value for shareholders, investors should consider an activist campaign. Activist campaigns can improve the stock price in the short-term but also attract an acquirer, facilitating an exit.
The activist campaign at NTS Inc. offers a strong example. NTS, headquartered in Lubbock Texas, provides high-speed broadband services to residential and business customers in Texas and Louisiana. The stock failed to thrive. Shareholders felt the problem was the Board of Directors. They had limited industry expertise and a long tenure with NTS. Activists supported the continued leadership of the CEO who was doing an excellent job. He needed a better team of advisors to support his efforts.
In October 2012, an activist group called Concerned NTS Shareholders (CNS) announced a proxy contest and requested representation on the Board. They also filed a 13D. After a meeting with management in November, the groups were able to come to an agreement. NTS expanded its Board from six to nine members. The new slate included four incumbent directors and five new nominees who represented the investors. The new slate was elected at the 2012 annual meeting.
The new Board immediately got to work. The team focused on improving capital allocation, monitoring cash flow and standardizing board reporting. They worked together to refine strategic decisions and ensure a proper growth plan was in place.
This work ultimately helped NTS to find an acquirer. On October 18, 2013, NTS agreed to be acquired for $2/share in cash by Tower Three Partners, an operationally-oriented private equity firm that invests in U.S.-based middle market companies.
The purchase price represented a premium of 27% over NTS’ closing share price that day and a premium of 24% over NTS’ average closing share price for the 30 trading days ending on October 18, 2013.
The acquisition was good for the investors but also for NTS as a company. NTS could now lower its cost of capital enabling a more aggressive growth strategy. The CEO remained at the helm and served for another year. The Company has continued to expand and has recently brought in additional management expertise. The former CEO is still a valued Board Member.
NTS is a great example of successful shareholder activism. It is an especially important tool for micro-cap investors.
Editor's Note: Elizabeth Kopple is a Director with IDWR Multi-Family Office, an organization that invests its own capital in micro cap proxy contests. Ms. Kopple is Co-Director of The Activists Association: www.activistsassociation.com. She can be reached at firstname.lastname@example.org.
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