Monday, March 19, 2012

ITEX Repurchasing Shares?

This is one of the most interesting press releases that I have read in a while... Basically, ITEX is offering to repurchase up to 1 million shares of it's own common stock at prices up to $4.20 per share. It's an amount that equals roughly 25% of the outstanding shares of the company...

From here on, this post is almost completely my own opinion...

First, in the last proxy contest, the company bought back shares, but, retained the voting rights on them so as to aid in the defeat of the Polonitza Group (it certainly seems that way, anyway).

Now, it seems ITEX's board stands ready to strip the company of the majority of it's cash in an effort to buy out shareholders that are reluctant owners... Who knows? It might be a way of trying to publicly greenmail Polonitza? However, I doubt that he will sell his shares, simply because of his purchase history and lawsuit against the company. To further complicate things in this matter, the company stated the following in an SEC filing:

The following directors and executive officers of ITEX have indicated their non-binding intention to tender up to the following number of shares, which represent 25% of their current holdings: Eric Best, a director, 6,250 shares; John Wade, a director and ITEX’s Treasurer and Secretary, 14,250 shares; and Steven White, ITEX’s Chairman of the Board of Directors and Chief Executive Officer, 144,421 shares, provided however, that the persons described above have indicated that in order to grant priority to other stockholders they will not tender any of their shares in the tender offer if: (a) 1,000,000 shares or more are properly tendered by other stockholders, or (b) as a result of their tender there would be proration of the shares tendered by all stockholders in the tender offer. 

The whole situation strikes me as a little bit odd. Don't get me wrong, on the face of things, repurchasing shares seems to be a fair move from the company, as it's shares seem undervalued, but it could potentially sway future annual meetings. Does it seem that I am reading too much into this? Well, this is likely a big shift in ITEX's thinking... While the company does have a history of repurchasing shares (getting ~14% of shares outstanding in a nearly 8 year period) this is a huge amount of shares for any company to try to buy back. Plus, check out what was said at one of the annual meetings by the company's general counsel, as remembered by an astute value investor named Sanjeev Parsad.

I remember the general counsel for ITEX telling me that there are several studies that show share buybacks don't actually benefit shareholders signficantly in the long-run, and then I had to explain that was because most corporations paid any price for their shares, rather than only buying them back when they were well under intrinsic value.
Furthermore, under the right circumstance, the repurchase could potentially trigger the poison pill that the company put in place and would make it much harder for activists to do their thing... Again, a very odd situation. I'm not going to come out and say that the managers at ITEX are bad guys, but, there certainly does seem to be a whole lot of smoke and mirrors here... It is almost as if they are offering to sell back some of their personal shares to give the illusion that they are sacrificing with shareholders? But, why would they sell their own shares, if they thought that they were undervalued? If they aren't undervalued, then why should the company buy them back? It wouldn't be a stretch to think that they are doing this, just so they can get a ton of shares from other shareholders in some sort of bait and switch tactic.

This continues to be one of the most fascinating situations that I can think of... In one corner, we have management that seems hell bent on holding onto a cash cow of a company, in the other, are a host of activists that seem to have a pretty solid case that they are running on.

Disclosure/Disclaimer: I own no shares of ITEX. Though, I am getting tempted to buy some shares... Also, I am generally sympathetic to the cause of most activist investors and in this case, the Polonitza Group... This is not advice of any kind and is solely my own opinion. Always do a ton of your own research before contemplating doing anything that I say, do, write, or so much as think about.

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