Monday, October 3, 2016

Surging Forward

I have owned Surge Components (SPRS) for some time now, but it is finally getting some love from the market. Business is not all that great, but some of the company's shareholders have decided to begin a proxy contest, which has investors excited that the company may be in play.

I've talked to more than one activist investor about this company over the years, but no one has wanted to bite. Management owns almost 24% of the company and the company's shares are difficult to acquire in number; these factors reduce the chances that an activist will be successful at generating a return on their capital.

So the largest shareholders themselves decided to band together and make it happen. They have been adding to their stakes and at my latest check now own more than 22% of the shares themselves! These are long-term shareholders who have followed the company for years, but who weren't getting anywhere in their discussions with management.

One of the major disagreements between shareholders and management is what to do with all the cash. The company has built up a $7 million cash position that it seems unwilling to return to shareholders. At times, the company's shares have traded at discounts to its cash, suggesting the market has no faith that management will do anything good with it. Shareholders want that cash returned. In a conversation I had with management, it was clear they had no intention of returning any of it.

If the proxy contest threatens their position, they may have no choice but to negotiate the return of the cash to shareholders. Shareholders should be very happy about this contest, in my opinion, as it is finally a chance to unlock some of the company's value that has been sitting on the balance sheet doing nothing. Voting with the shareholders puts pressure on management to do the right thing, and so that's what I intent to do.

Disclosure: Author has a long position in shares of SPRS

1 comment:

juan said...

I'll vote with shareholders too.

Management hasn't cared much for shareholders: there's the accumulation of cash you mentioned, but also the constant share dilution, the 2m+ golden parachutes, and the recent attempt to buy out the two activist shareholders (greenmail?).

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