By Gus G. Sentementes, The Baltimore Sun
7:10 PM EDT, September 17, 2012
An activist investor's push for a sale or merger at TeleCommunication Systems Inc. may be gaining traction.
J. Carlo Cannell has been accumulating shares and now holds a roughly 5.8 percent stake in the Annapolis company. In a letter to TCS last week, Cannell called for a sale or merger, citing the company's slumping stock price and lack of strategic direction.
Such talk appears to be gathering momentum within the investment community, said analyst Scott Sutherland of Wedbush Securities, who has covered the company for several years.
"I'm in complete agreement with investors that [TCS] is not properly valued," Sutherland said. "A lot of people see the value in separate parts."
Stock in TCS, after languishing below $2 a share since May, broke through that level earlier this month and closed Monday at $2.20 in Nasdaq trading. That's far below its 10-year high of $9.81 a share in April 2009.
The current stock price undervalues TCS's many assets, including a $100 million patent portfolio, Sutherland said. TCS has developed two broad businesses: government and commercial telecommunications systems. Both can be standalone businesses, with non-core assets sold to the benefit of investors, he said.
But, he added, investors are nervous about a $103.5 million convertible note that comes due in October 2014. The company either needs to come up with a large amount of cash to pay back the note holders or the debt will be converted to stock further diluting stockholder value, he said.
TCS used the loan to buy six companies over the past three years, according to company documents. In his letter, addressed to TCS's chief financial officer, Cannell called them "questionable acquisitions."
Meredith Allen, a spokeswoman for TCS, said the company had "no comment" on Cannell's letter.
The company counts the federal government, particularly the Department of Defense, as one of its biggest customers. It sells government agencies satellite and other wireless communication field systems and services. TCS' government contracts account for about $270 million in revenue, or 60 percent, for the year, according to a company fact sheet.
TCS is bullish on the government satellite communications market, citing an analyst's report that it would double to $9 billion a year in 2020.
The rest of the company's annual revenue, or nearly $180 million, comes from its sale of systems and services to major commercial telecommunications carriers. TCS sells location-based services such as E-911 and Next Generation 911, the newly developing standard in public emergency communications.
In its last quarter, ended June 30, TCS lost $111 million, mainly due to a write-down of a 2009 acquisition, on revenues of $114 million.
Cannell's firm is one of the top institutional investors in TCS, having accumulated more than 3 million shares, according to last week's SEC filing that included his letter to the firm. In the two months before he wrote the letter, Cannell bought more than 221,000 shares for between $1.19 and $1.48 per share.
In his letter to TCS, Cannell cited a research report by Sutherland, who found that the company's net assets were worth between $7.40 and $11.81 per share.
Cannell is widely regarded as an activist investor. After graduating from Princeton University with a liberal arts degree, he founded his investment company in 1992 with $600,000 in assets under management.
A 2009 profile in the Chicago Tribune described him as a hedge-fund activist investor with mixed results. He's gained a reputation as a value investor who challenges executives of companies that are doing okay, but could still do better for their investors.
In his letter, Cannell said he tried to meet with TCS CEO Maurice B. Tosé on several occasions, but he was unavailable — and Cannell called him "reclusive."
Cannell argues the company needs a strategic direction, making reference to the Naval Academy backgrounds of Tosé and others within TCS: "In nautical terms (which should resonate with the background of many of your brethren) is the hand of the reclusive skipper (Tosé) positioned firmly on the tiller?"
Cannell could not be reached for comment on Monday.
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