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As Of Filer Filing For·On·As Docs:Size Issuer Agent 4/26/10 Discovery Equity Partners, LP SC 13D/A 5:2.6M Tessco Technologies Inc Toppan Vite NY Inc./FA Daniel J. Donoghue Discovery Group I, LLC Michael R. Murphy |
Document/Exhibit Description Pages Size 1: SC 13D/A SC 13D (Amendment No. 9) HTML 84K 2: EX-1 Underwriting Agreement HTML 157K 3: EX-2 Plan of Acquisition, Reorganization, Arrangement, HTML 13K Liquidation or Succession 4: EX-3 Articles of Incorporation/Organization or By-Laws HTML 11K 5: EX-4 Instrument Defining the Rights of Security Holders HTML 11K
Section
I Poor Governance Structure
Section
II Current Governance Crisis
Section
III Negative Impact on Shareholders
Section
IV Recommendations to Reclaim Shareholder Value
Appendix
B Discovery’s 14(a)-8 Shareholder Proposal Re: Board Declassification
(February 1, 2010)
Appendix
C Discovery’s Letter to the Board of Directors Re: 2009 Shareholder
Meeting Results (July 23, 2009)
Appendix
D Discovery’s 14(a)-8 Shareholder Proposal Re: Poison Pill (January 28,
2009)
Appendix
E Discovery’s Letter to the Board of Directors Re: Negative Response to
Brightpoint (July 8, 2008)
TABLE
OF CONTENTS
|
Chairman
and Chief Executive Officer vested in one person, the largest
shareholder
Staggered
Board
Plurality
Voting
Low
Director Ownership of TESS Stock
“A
business corporation’s core objective is to create and increase wealth for
its shareholders.”
Corporate
Director’s Guidebook, Fifth Edition, Committee on Corporate Laws, American
Bar Association.
Poor
Governance Structure
|
Poor
Governance Structure (Continued)
Chairman
and Chief Executive Officer vested in one person, the largest
shareholder
According
to the Millstein Center for Corporate Governance and Performance, Yale
School of Management, the number
of
non-executive chairmen at companies in North America has been increasing
year by year. Recent figures, according to
the
2008 Spencer Stuart Board Index1, indicate that the last decade has seen a
growing trend in separating the roles of the
Chief
Executive Officer (CEO) and the Chairman of the Board
Current
data shows in 2008 as many as 39% of S&P 500 companies appoint someone
other than the CEO to chair the
Board,
a significant increase from the 16% in 1998
The
arguments for separating the roles of chair and CEO are clear. In
governance as in government, splitting the roles is
ideologically
consistent with the view that a system of checks and balances is the best
protection against unrestrained
power.2
The combination of the roles of chair and CEO is inconsistent with the
notion that the Board is to act at all times
independently,
and at times critically, of the CEO
1
The Spencer Stuart Board Index is an annual study that examines the state
of corporate governance among the S&P 500. The 2008 index looks at how
boards have changed in the past 10 years.
Among
other findings, a key takeaway in the 23rd edition is the increased
independence and changing makeup of today’s S&P 500
board.
2
Ira M. Millstein, The Two-Headed UK Model Could Work Here, With
Fine-Tuning, 6 Corporate Board Member 62 (Mar./Apr. 2003); David W.
Anderson, The Chair and CEO: Two Leaders, One
Vision?
ICD Director, 126, June 2006, pp.
28-30.
|
Poor
Governance Structure (Continued)
Staggered
Board
RiskMetrics
states that “directors should be accountable to shareholders on an annual
basis.” It argues that “the only real
motive
for Board classification is to make it more difficult to change control of
the Board.”
RiskMetrics
also states: “A classified Board can (1) delay a takeover desired by
shareholders but opposed by management,
and
(2) prevent bidders from even approaching a target company if they do not
want to wait more than a year to gain
majority
control. Shareholders lose in both cases, and management has less
incentive to keep shares fully valued if the
directors’
Board seats are secure.”3
In
the last decade, the move away from classified Boards has accelerated.
According to Georgeson and Sharkrepellent.net,
the
percentage of S&P 500 companies with classified Boards has dropped
from 60.4% in 1999 to 32.2% in 2009.
Clearly,
best-of-class companies are embracing improved shareholder rights and
protections
3
RiskMetrics 2009 US Voting Manual.
|
Poor
Governance Structure (Continued)
Plurality
Voting
Director
nominees that obtain the most votes win election to the Board, even if
they fail to obtain a majority
Plurality
voting goes against best-practice governance by insulating the directors
and management from the consequences
of
poor stewardship
The
push for majority-voting rules is being driven by institutional investors,
and the media has brought more focus to it as
it
is an important trend in shareholder rights
According
to RiskMetrics’ 2009 Proxy Season Scorecard, of the 51 shareholder
proposals to require a majority vote to
elect
directors, the average shareholder support was 58%, which is up from 51%
in 2008
RiskMetrics’
policy is to vote FOR resolutions requesting that the Board change the
company’s bylaws to require
majority-voting
of directors
|
Poor
Governance Structure (Continued)
Low
Director Ownership of TESS Stock
The
most current SEC filings indicate that non-management directors have
beneficial ownership in 5.3% of the
outstanding
TESSCO shares
Excluding
equity securities that directors were granted, the ownership level of
non-management directors is not even 1%
The
best interests of shareholders are not closely aligned with the Board when
such insignificant ownership positions are
held
in non-management directors’ personal accounts
Even
more discouraging, the ownership level would be higher except that many of
the directors have sold vested equity
awards
in the past
|
Rebuffing
Takeover Overtures
Adopting
Poison Pill
Raising
Barriers to Special Shareholder Meetings
Failure
to Hold Management Accountable for Inferior Financial
Performance
Excess
Compensation to Management and Directors
Employing
Family Members of the Chief Executive Officer
Current
Governance Crisis
|
Current
Governance Crisis (Continued)
Rebuffing
Takeover Overtures
Brightpoint
is clearly interested in an acquisition of TESSCO as evidenced by their
November 19, 2007 filing that
disclosed
the purchase of 470,000 shares, which was 9.1% of the outstanding TESSCO
common stock
Several
other strategic parties are interested in pursuing an acquisition of
TESSCO
A
large number of private equity firms have considered pursuing a
going-private transaction for TESSCO
We
know of this interest level because many of these parties have identified
Discovery as the largest independent
shareholder
and called us to express their interest directly
Virtually
all potential suitors have expressed great frustration about not being
able to get a sincere response from Mr.
Barnhill
|
Current
Governance Crisis (Continued)
Adopting
Poison Pill
In
direct response to Brightpoint’s acquisition of 9.1% of the outstanding
TESSCO shares, the Board adopted a Poison Pill
The
adoption of the Poison Pill was a clear signal to Brightpoint and all
market constituents that the Board was not open
to
being acquired
We
submitted a 14(a)-8 shareholder proposal for the 2009 meeting because we
believed shareholders would want to
dismantle
the Poison Pill as a barrier to a transaction
Our
proposal received an overwhelming 75% of the votes cast by non-management
shareholders as well as an
endorsement
from RiskMetrics, the leading proxy advisory firm. Yet the Board ignored
the shareholder’s directive and
maintains
this antiquated anti-takeover mechanism
At
present only 28% of the companies in the S&P 500 have Poison Pills and
that number is in decline
|
Current
Governance Crisis (Continued)
Raising
Barriers to Special Shareholder Meetings
An
additional action the Board took to protect it from Brightpoint was to
raise the threshold number of shareholders
required
to call a special meeting from 25% to 50%
In
order to implement such a material change to corporate governance the
Board members should have put it to vote for
all
shareholders
A
defensive maneuver like this is not supported by RiskMetrics, as they vote
AGAINST proposals to restrict or prohibit
shareholder
ability to call special meetings and vote FOR proposals that remove
restrictions on the right of shareholders
to
act independently of management
Recent
articles in the Wall Street Journal have highlighted an upsurge in U.S.
companies removing hurdles for
shareholders
to call a special meeting
|
Current
Governance Crisis (Continued)
Failure
to Hold Management Accountable for Inferior Financial
Performance
In
2005 Mr. Barnhill had an operating plan that called for improving
operating margins to 4-5% and doubling earnings
per
share every year for five years. The string of operating margins from 2005
to 2009 turned out to be; 2.0%, 1.8%,
2.5%,
1.6%, 2.3%. The 2005 earnings per share was $0.92 and the 2009 earnings
per share was $1.26
Clearly
management’s performance was woefully short of plan. Yet from 2005 to 2009
the top five executives received
aggregate
compensation as follows: $2.3mm, $2.6mm, $4.1mm, $3.3mm, $3.7mm,
respectively. A grand total of $16.1
million
The
same top five executives that oversaw the execution of the failed 2005
operating plan are all still in their respective
positions
leading the Company today
It
is common practice among entrenched management teams to have an operating
plan, often grandiose in scope, which
can
be used to defend against unwanted takeover inquires
Disregarding
the clear history of underperformance, and accepting management’s newest
operating plan, at the expense of
legitimate
strategic alternatives compromises the Board’s fiduciary duty to
shareholders
|
Current
Governance Crisis (Continued)
Excess
Compensation to Management and Directors
Total
compensation for Mr. Barnhill shown in last year’s proxy statement was
$1.6 million, which we consider
egregiously
higher than the median CEO compensation of $625,000 for public companies
in TESSCO’s 8th decile size
range
Mr.
Barnhill is a steady seller of TESSCO stock, which puts pressure on an
already illiquid market and destabilizes
investor
confidence in the Company, yet his ownership stake is regularly
replenished through equity securities given to
him
by the Board
Shareholders
are not well served having their ownership positions diluted by giving
equity to executives that are only
interested
in selling the stock
Employing
Family Members of the Chief Executive Officer
As
reported in the 2008 proxy statement, the Company employed Mr. Barnhill’s
wife and son, which many view as
questionable
business practice
Another
of Mr. Barnhill’s son is employed by an architecture firm that billed the
Company $182,514 for future facilities
planning
and design services rendered during fiscal year
2007
|
Section
III
Negative
Impact on Shareholders
|
Significantly
depressed Company valuation
Poor
governance thwarts analyst coverage and institutional investor
interest
Premium
valuation from potential suitors are rebuffed
Negative
Impact on Shareholders
Chart
for TESSCO Technologies Inc. (TESS)
|
Negative
Impact on Shareholders (Continued)
Valuation
analysis per Discovery’s March 4, 2010 filing
Average
LTM EBITDA Multiple: 6.0x
Standard
Deviation: 2.3x
+
1 / - 1 Standard Deviation: 3.7x – 8.3x
Tessco's
Historical Enterprise Value / LTM EBITDA Valuation Multiple:
1999-2009
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
CY
Q4 1999
CY
Q2 2000
CY
Q4 2000
CY
Q2 2001
CY
Q4 2001
CY
Q2 2002
CY
Q4 2002
CY
Q2 2003
CY
Q4 2003
CY
Q2 2004
CY
Q4 2004
CY
Q2 2005
CY
Q4 2005
CY
Q2 2006
CY
Q4 2006
CY
Q2 2007
CY
Q4 2007
CY
Q2 2008
CY
Q4 2008
CY
Q2 2009
CY
Q4 2009
Tessco's
Historical Enterprise Value / LTM EBITDA Valuation Multiple:
1999-2009
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
CY
Q4 1999
CY
Q2 2000
CY
Q4 2000
CY
Q2 2001
CY
Q4 2001
CY
Q2 2002
CY
Q4 2002
CY
Q2 2003
CY
Q4 2003
CY
Q2 2004
CY
Q4 2004
CY
Q2 2005
CY
Q4 2005
CY
Q2 2006
CY
Q4 2006
CY
Q2 2007
CY
Q4 2007
CY
Q2 2008
CY
Q4 2008
CY
Q2 2009
CY
Q4 2009
|
Negative
Impact on Shareholders (Continued)
Public
Market / Equity Research: $14.00 - $21.96
3-Month
Trading Range: $14.00 - $21.96 EV: $68 - $111 million
2-Year
Trading Range: $5.56 - $21.96
William
Blair: Hold at $18.20 (Jan-10)
Comparable
Public Companies: $30.60 - $36.00
8.0x
- 9.5x F2010 EBITDA EV: $155 - $184 million
10.0x
- 12.0x F2010 EBIT $30.20 - $35.90
EV:
$153 - $183 million
Comparable
M&A Transactions: $34.20 - $39.60
9.0x
- 10.5x F2010 EBITDA EV: $174 - $203 million
11.0x
- 13.0x F2010 EBIT $33.05 - $38.70
EV:
$168 - $198 million
BrightPoint
Accretion Analysis $31.10 - $34.75
8.0x
- 9.0x F2010 EBITDA EV: $158 - $178 million
$0.02
to $0.07 EPS Accretive
Synergies
of $5 to $10 million
Recent
Small Cap M&A Valuations: $28.85 - $34.20
7.5x
- 9.0x F2010 EBITDA EV: $145 - $174 million
10.0x
- 12.0x F2010 EBIT $30.20 - $35.90
EV:
$153 - $183 million
Small
Cap M&A Premiums: $25.80 - $31.75
30%
- 60% (4-Week Premium) EV: $132 - $164 million
$19.85
Current Price
$14
$16 $18 $20 $22 $24 $26 $28 $30 $32 $34 $36 $38 $40 $42
TESS
Per Share Value
Valuation
analysis per Discovery’s March 4, 2010 filing
($
in millions; FYE 3/31) Fiscal TTM Fiscal
Key
Financial Data 2009A 9/30/09 2010P
Revenue
$483.0 $458.9 $515.9
EBIT
$11.2 $11.3 $15.3
EBITDA
$15.4 $15.4 $19.3
|
Section
IV
Recommendations
to Reclaim Shareholder Value
|
Establish
a standing Strategic Alternatives Committee of independent directors to
meet regularly and evaluate
strategic
opportunities, including expressions of takeover interest
Hire
an investment banker to evaluate takeover interests that currently
exist
Eliminate
poison pill to indicate the Board’s openness to exploring a
transaction
Establish
annual election of all directors
Establish
majority voting standard
Split
Chairman and Chief Executive Officer role
Appoint
non-executive Chairman
Facilitate
Special Shareholder Meetings by reinstating 25% threshold
Improve
the alignment between directors and shareholders through stock ownership
guidelines for directors
that
include investments in the stock with personal funds, not just grants of
options and stock
Recommendations
to Reclaim Shareholder Value
|
Appendix
A
Discovery’s
Letter to the Board of Directors
Re:
Rebuffing Offers (March 4, 2010)
|
Daniel
J. Donoghue
Managing
Partner
1
312 265 9604
|
|
●
|
Missed Operating
Targets. When Discovery Group first began investing in
TESSCO in 2005, management had an operating plan, characterized by Mr.
Barnhill as “taken to the Board”, that would improve operating margins to
4-5% and double earnings per share (“EPS”) every year for five
years. The string of operating margins from 2005 to 2009 turned
out to be; 2.0%, 1.8%, 2.5%, 1.6%, 2.3%. The 2005 EPS was $.92 and the
2009 EPS was $1.26. Obviously, management’s performance was
woefully short of plan. It is our understanding that management
has recently hatched a new plan to double revenues and double margins
within a few short years. It is common practice among
entrenched management teams to have an operating plan, often grandiose in
scope, which can be used to defend against unwanted takeover
inquiries. While we would be thrilled by such outstanding
performance, the Board must not ignore the clear and relevant history of
over-promising by this management team when evaluating shareholder
alternatives.
|
|
●
|
Adoption of a “Poison Pill”.
In 2008, the Board adopted a poison pill rights plan in response to
the accumulation of 9.9% of TESSCO’s shares by Brightpoint,
Inc. As a large distributor of cellular equipment, Brightpoint
is a credible strategic acquirer of TESSCO. We believe that the
threat that management might lose control of the Company to Brightpoint
was the catalyst for establishing the poison pill. The Board’s
action signaled to Brightpoint, and all other potential suitors, that the
leadership at TESSCO was not amenable to a transaction. We
believe the proper response would have been to engage in an exploratory
dialogue with Brightpoint. At last year’s annual shareholder
meeting we submitted a proposal to eliminate the poison
pill. We demonstrated that TESSCO’s poison pill runs counter to
modern corporate governance practices. Our proposal received
the endorsement of Riskmetrics, the leading proxy advisor to institutional
investors. An overwhelming 75% of non-management shareholders
voted for our proposal yet the TESSCO Board ignored this important request
of its constituency.
|
|
●
|
Staggered Director Elections.
For this year’s annual shareholder meeting, Discovery Group has
submitted a proposal to eliminate TESSCO’s staggered director terms, so
that each director must stand for reelection every year. Like
the poison pill, TESSCO’s staggered board terms are not, in our view,
consistent with good governance practices and trends among public
companies. The best corrective action would be for the Board to
embrace our proposal without putting it up for shareholder
vote.
|
|
●
|
Rebuffing Takeover
Overtures. Several well-intentioned and credible private
equity firms and public corporations have contacted us to express their
frustration about not being able to get a sincere response to their calls
to Mr. Barnhill. They interpret Mr. Barnhill’s unresponsiveness
as a clear signal that he is not interested in discussing potential
transactions, regardless of the benefit to the public
shareholders. The Board’s reaction to Brightpoint, which
included the adoption of a poison pill and the “greenmail” tactic of
repurchasing Brightpoint’s shares, pursuant to an offer that was not
likewise extended to other shareholders, suggests that the Board stands
behind Mr. Barnhill’s
unresponsiveness.
|
Appendix
B
Discovery’s
14(a)-8 Shareholder Proposal
Re:
Board Declassification (February 1,
2010)
|
Daniel
J. Donoghue
Managing
Partner
1
312 265 9604
|
Sincerely,
|
|||
DISCOVERY EQUITY PARTNERS, L.P. | |||
|
By:
|
Discovery Group I, LLC, its General Partner |
Appendix
C
Discovery’s
Letter to the Board of Directors
|
Daniel
J. Donoghue
Managing
Partner
1
312 265 9604
|
By:
|
||
Name: Daniel J. Donoghue, Managing Member |
Daniel
J. Donoghue
Managing
Partner
1
312 265 9604
|
Sincerely,
|
|||
DISCOVERY EQUITY PARTNERS, L.P. | |||
|
By:
|
Discovery Group I, LLC, its General Partner |
|
By:
|
||
Daniel J. Donoghue, Managing Member |
Appendix
E
Discovery’s
Letter to the Board of Directors
|
Daniel
J. Donoghue
Managing
Partner
1
312 265 9604
|
|
|
||
DISCOVERY
GROUP I, LLC
|
|
||
|
|
|
|
|
|
|
|
By:
|
/s/
Daniel J. Donoghue
|
|
|
|
Daniel
J. Donoghue
|
|
|
|
Managing
Member
|
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This ‘SC 13D/A’ Filing | Date | Other Filings | ||
---|---|---|---|---|
Filed on: | 4/26/10 | 8-A12B/A, 8-K | ||
4/22/10 | ||||
3/31/10 | ||||
3/4/10 | ||||
2/1/10 | ||||
1/20/10 | 8-K | |||
7/23/09 | 4, 8-K, DEF 14A | |||
7/9/09 | 4 | |||
7/7/09 | 4 | |||
7/1/09 | 4 | |||
6/25/09 | 4 | |||
6/22/09 | 4 | |||
6/12/09 | 4, DEF 14A, DEFA14A | |||
6/8/09 | 4 | |||
6/3/09 | 4 | |||
4/13/09 | 4 | |||
3/23/09 | 4 | |||
1/28/09 | PRRN14A | |||
7/24/08 | 4, 8-K, DEF 14A | |||
7/8/08 | ||||
7/3/08 | 4 | |||
7/1/08 | 4, SC 13D/A | |||
6/30/08 | 3, 4, 8-K | |||
6/12/08 | 10-K, SC 13D/A | |||
2/1/08 | 8-A12B, 8-K, SC 13D/A | |||
11/19/07 | SC 13D | |||
List all Filings |