Edgetech Services, Inc. (OTCBB: EDGH) is an IT services firm, with an uncertain financial future. As we saw in Part I of this series, the Company recently reported that it had just $18,000 in the bank – and its auditors have expressed substantial doubt about its ability to continue as a going concern. That may not sound too appealing to ordinary investors, but a merger and acquisition firm, with the impressive name of Hollingsworth, Rothwell & Roxford (HRR) has offered to buy 90% of Edgetech’s outstanding stock at $1 a share. When HRR made the offer, Edgetech stock was selling at 16 cents a share.
As we discovered, this was not HRR’s first attempt to acquire or influence a public company.
Measuring Success
Taking control of Edgetech is only the latest in a series of bold – though baffling - initiatives by HRR. As HRR pointed out in its July 30th offer letter to Edgetech, the self-described merger and acquisition firm recently made an offer to acquire all of the outstanding shares of Zapata Corporation (NYSE: ZAP). Zapata, which was founded as an oil company in 1953 by former President George Bush, now is in the “marine protein business.” (See Viva Zapata -- Zapata Corp.).HRR did not succeed with that effort, at least not in the sense that it actually acquired control of Zapata. Then again, from HRR’s viewpoint, there apparently is more than one way to measure success.
The Zapata bid bore striking resemblance to HRR’s offer to Edgetech. On March 5, 2003, Zapata disclosed that it had received an unsolicited e-mail from HRR, offering to acquire all outstanding Zapata stock at $45 a share. The offer was promptly rejected by Zapata’s Board of Directors. Two months later, on June 13th, HRR raised its offer to $51 a share.
Approximately 3 million shares of Zapata common stock were outstanding as of March 31, 2003 – which meant the acquisition might have cost HRR as much as $153 million. As best we can determine, HRR has not disclose publicly its own financial condition, or how it intended to pay for those shares if its offer had been accepted.
Payment, however, never became an issue. On July 15th, after Zapata stock had exceeded the $51 offer price, HRR declared that it had “achieved its objectives in enhancing shareholder value in Zapata” and was now throwing its support behind that Company’s Board of Directors.
How did HRR benefit from achieving its objectives? Was there ever a realistic possibility of an acquisition? Enhancing shareholder value is a noble objective, but what did HRR gain from its purported success? HRR’s July 15th press release did not say. Instead, HRR took the opportunity to solicit new business “partners” for “new and very undervalued publicly traded investments and acquisitions” similar to the proposed Zapata deal. According to HRR – which said it had 23 years of experience in mergers and acquisitions - that would include “a large producing gold company that trades on the NYSE that we are currently in friendly talks with, and of which we would pay dividends in gold produced by the company to all of our partners in the acquisition.” HRR did not identify the potential target company.
Then again, if those deals ended without a successful acquisition, à la Zapata, what would those investors gain?
Does the Edgetech offer represent one of those new opportunities? In its July 30th offer letter to Edgetech, HRR claimed that it intended “to achieve the same success for Edgetech Services shareholders as we did for Zapata Corporation shareholders.” Again, absent a successful acquisition, what’s in it for HRR?
Sony! No Baloney!
HRR has had more than Zapata on its mind in recent months. On March 18, 2003, HRR filed a proxy solicitation with the SEC asking the directors of Sony Corporation (NYSE: SNE) to spin off to Sony shareholders 90% of a series of subsidiaries, which it called Sony Electronics, Sony Insurance, Sony Games, Sony Pictures, Sony Music, Sony Real Estate, and other Sony assets, at prices designated by HRR.In a March 18, 2003 press release, HRR claimed that the Sony spin-offs were calculated “to enhance value for Sony…shareholders for $72.40 a share in spin-offs, in addition to the value of Sony Holding Company.” At the time, Sony shares were trading at under $37 a share.
On April 10th, HRR announced that Sony had declined the proposal, was refusing to provide HRR with its shareholder list, and would not include the spin-off scenario with its proxy materials. Like Zapata, Sony had rejected HRR’s advances. HRR expressed its consternation in an April 10th press release, pointing out that Zapata share prices had fallen after its $45 bid was rebuffed. HRR partner, Theodore Roxford implored unhappy Sony shareholders to support HRR, and urged Zapata shareholders to show for a pending class action lawsuit against that Company. Indeed, HRR posted messages on at least one Internet message board, called VoyForums, asking Sony shareholders to lend their support.
There was more to come. On June 13, 2003, the same day HRR raised its Zapata bid to $51, the merger-acquisition specialists also announced that they had filed a $15.1 billion lawsuit against Sony in Federal District Court in Florida charging, among other things, fraud and violation of the Racketeering Influenced and Corrupt Organizations Act (RICO). In essence, the lawsuit charges that Sony refused to enhance shareholder value when it rejected the HRR offer. HRR has promised to share the proceeds of that action equally “with every Sony shareholder of record date February 7, 2003 or before who e-mails HRR their support.”
Of course, HRR also wants those Sony shareholders to share in the litigation expenses.
The plaintiff in this litigation is Theodore Roxford, who states that he is the sole owner of HRR.
As Sundance said to Butch, who is this guy?
In Part III of this series we will take a further look at HRR, and at Theodore Roxford, the man behind the firm.
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