News Analysis: o2o on the hunt

UK reseller office2office (o2o) has confirmed it has rejected a proposal by an activist shareholder who is vying to win three seats on the company's board.

US investor’s Project Arrow reverse merger proposal is rejected by the o2o board. On 26 March, o2o revealed that US investor Nick Gerber – who owns over 9% of the firm’s shares – was nominating himself and two other representatives for places on the reseller’s board of directors.

o2o subsequently admitted that it had already rejected a “preliminary merger proposal” with two of Gerber’s companies – a US fund management business and a Bulgarian website development start-up – on the basis that the proposal had “no strategic or commercial logic”.

In a stock market statement o2o said that Gerber’s attempts at board representation could potentially enable him to drive his agenda forward and reiterated its view that his proposal was “not in the best interests of the company’s shareholders and stakeholders”.

“The board intends to continue its stated strategy to improve performance and strengthen the business by cutting costs, reducing debt, remodelling the logistics platform and focusing on growing Business Critical Services whilst protecting Managed Procurement’s margins in the tough office supplies market,” the company stated. “The board is of the view that this strategy will deliver greater value to shareholders,” it added.

o2o said it was investigating the “validity” of Gerber’s resolutions and advised shareholders to take no action for the time being.

Serial entrepreneur

But who is Nick Gerber, and what exactly is he proposing? OPI obtained his proposal document and has had a series of email exchanges with the man himself.

The California-based investor told OPI he first became interested in o2o when its share price fell off a cliff last July – losing 50% of its value virtually overnight. “Being a value portfolio manager, I scour the world looking for undervalued firms,” he said. “One of the first things I look for is stock hitting new 12-month lows and if it deserves that treatment from ‘Mr Market’. It is sound underlying businesses with depressed stock prices that catch my eye.”

With o2o firmly on his radar screen, Gerber – who describes himself as a ‘serial entrepreneur’ – began buying up shares late last year, taking his stake to more than 9% on 20 January.

Was he just a pragmatic ‘bottom feeder’ waiting for an upswing in the share price, or did he have bigger plans for o2o? The answer to that came on 19 February when he sent o2o a proposal for a reverse merger under the name of ‘Project Arrow’.

The 11-page Project Arrow document outlined Gerber’s vision for the transformation of o2o into a fund management and software group. This would be achieved by o2o acquiring two of Gerber’s firms – Wainwright Holdings, a US-based fund management firm with 2012 revenue of $18.2 million, and Microweber, a Bulgaria-registered website domain name start-up with virtually zero income – and then performing a reverse merger which would install Gerber as CEO of a new office2office group.

“Win-win” situation

The total value of Gerber’s proposal is put at £64 million ($107 million) with o2o’s shareholders having a 25% stake in the new entity. This values o2o at about £16 million, more than double its current market capitalisation, but about eight times lower than in April 2012.

“I believe the proposal is a win-win for both our organisations and shareholders and will create a platform for long-term growth,” Gerber stated in a 19 February letter to o2o CEO Simon Moate.

o2o’s response to Gerber came back on 10 March in the form of a rejection letter. In the letter, o2o Chairman Jim Cohen told Gerber that the company’s board and its financial advisor Rothschild had concluded that there were “alternative strategic options for office2office that are more feasible and likely to deliver greater shareholder value than Project Arrow”.

“If the outside directors of office2office are executing on alternative, more feasible options that they consider might deliver greater shareholder value, then they should enumerate those strategies,” was Gerber’s response to that.

Rejection

“For two years now, the shareholders of office2office have suffered declining profits, disappearing dividends and, in the last 12 months, a 70%-plus decline in their share price. And all this during an economic recovery and a bullish stock market.”

The rejection of his proposal prompted Gerber into launching his shareholder proxy challenge and he says he had already made contact with a number of larger shareholders to introduce himself and his idea.

However, even Gerber himself admits his idea is a “radical” one.

“Even educated institutional investors with a fiduciary responsibility to learn as much as they can about all alternatives hate change, even if it may be good for them and their wallets,” he said.

Gerber now needs at least 51% support for his proxy challenge at o2o’s AGM at the end of May to gain three seats on the board and be in a position to push through his merger proposal. That’s certainly going to be a challenge, but Gerber maintains he is serious about his vision for o2o and not just making a noise to boost the share price – and then sell out at a profit.

“I am not so smart as to create tactical situations which spark short-term price increases allowing me a handsome profit,” he argued. “I initially proposed the reverse merger idea privately. Had office2office acted upon it, there would have been no proxy challenge; we would have done the merger which would have made me the largest single shareholder (an illiquid position), and I probably would have agreed to not sell any of my shares for a year.

“All of this that I wanted to happen – and still do – aligns my interests directly with those of long-term shareholders.”

In order to give his proposal credibility with o2o’s institutional shareholders, one of Gerber’s nominees for the o2o board is Peter Thornton, the well-known UK businessman and ex-Chairman of the Thorntons chocolate company. Gerber’s relationship with Thornton goes back to late 2012 when the American mooted a similar reverse merger proposal for Thorntons after its share price had slumped to below 40p. Gerber said that deal never got off the ground because Thorntons’ share price then rallied over the following months.

Gerber added that there have also been other similar transactions that he “walked away from” because either the target company didn’t turn out to be a good fit or the share price moved up.

Stronger together

So far, o2o’s share price has not been boosted by this reverse merger talk and Gerber maintains that the firm – especially its Managed Communication unit – ties in with his financial services and software vision.

“office2office is a great company and its stock is undervalued even without voting me in,” he stated. “However, what it might be able to do in 4-5 years alone we could do in 2-3 together. I’m not going away.”

Let’s now see if o2o’s shareholders share Gerber’s optimism.