Qumu (QUMU) – Merger Arbitrage – 7% Upside

Current Price: $1.80

Offer Price: $1.93

Upside: 7%

Closing date: mid 2020

Presentation

 

This is a merger between two nano cap SaaS companies. Video platform services provider Qumu is being acquired by a digital technology company Synacor in an all stock transaction - 1.61 SYNC shares for each QUMU share. Currently spread stands at 8%, while borrow is available and cheap.

Shareholder approvals from both companies is required. Currently 24% of SYNC and 12% of QUMU shareholders have signed the support agreements.

Transaction comes at a slight discount to pre-announcement price ($2.44/share vs $2.52/share), so the risk of QUMU shareholders rejecting the merger definitely exists, however the business of the target company has been showing a lackluster performance for the last several years and the largest shareholder (10.3%) supports the transaction.

 

Additional points

  • The strategic rationale behind the transaction is mostly related to scale issues of the companies and various cross selling opportunities. Synergies from operating expenses are expected to be at $4m-$5m in the first year (vs $90m of QUMU in '18 and $140m of SYNC in '18) and 40% of that will be realized through eliminating duplicative public listing costs.
  • Cross selling opportunities come mainly from offering Qumu video platform to about 4000 business, government, content provider etc. SYNC customers and 1900 channel partners as well.
  • SYNC has some experience with M&A and has previously acquired publisher advertising company Technorati ($3m) in 2016 and email/messaging software company Zimbra for $24.5m in 2015.
  • Both companies show a lackluster performance, are not profitable and last year most major shareholders of both companies were decreasing their stakes.

 

QUMU

The company provides software solutions to create, manage, secure, distribute and measure the success of live and on-demand video for enterprises. QUMU has about 175 customers, who annually bring ~$25m revenues. For the last 4 years revenues have been shrinking on average by 7%.

Shareholders:

  • Harbert Discovery Fund -10.3% (supports the transaction)
  • Renessaince Fund - 5.7%
  • Palogic Value Management - 3.7%
  • Dolphin Limited Partnership - 4.5%

SYNC

Synacor is a digital technology company that provides email and collaboration software, cloud-based identity management platforms, managed web and mobile portals, and advertising solutions. The company has two reportable segments: Software & Services (33%) and Portal & Advertising (67%). For the last 5 quarters SYNC revenues have been shrinking on average by 8% YoY.

Shareholders:

  • Walden International - 9.9% (supports the transaction)
  • 180 Degree Capital - 7.5% (supports the transaction)
  • Advantage Capital - 5.6% (supports the transaction)
  • Vanguard - 5.3%
  • Ariel Investments - 3.4%

 

4 COMMENTS

  1. Ilja

    Spread has been eliminated. So the idea is closed with 7% profit in 1.5 month

  2. davea500

    Interesting piece here – makes one wonder how QUMU shareholders might vote with a fixed consideration established pre-COVID.

    https://www.businesswire.com/news/home/20200331005197/en/

    Excerpt from article:
    March 31, 2020 09:15 AM Eastern Daylight Time
    MINNEAPOLIS–(BUSINESS WIRE)–Qumu, the leading provider of Enterprise Video as a Service (EVaaS)™ technology for the intelligent enterprise, revealed the use of its cloud-based enterprise video solution is up over 30x from normal levels during peak business hours. This increased usage is a result of the company’s Global 2000 customer base mobilizing to support thousands—and in many cases tens of thousands—of concurrent video users, as they operate under travel restrictions and mandatory work-at-home policies.

  3. davea500

    Anyone else find it notable that CEO did NOT mention consummating the SYNC merger as one of the areas of focus in his quarterly earnings call summary?

    Vernon J. Hanzlik, Qumu Corporation – President, CEO & Director 5/5/20 earnings call: “Thanks, Dave, to wrap up Qumu’s business remains strong and given the current sales activity, we anticipate we will come through the current global crisis stronger than ever. Interest in our platform is high by multiple measures. Our sales pipeline has grown by more than 30%. We have significant revenue backlog, and our customer retention remains high at 90%.

    Going forward, our focus will be as follows: to further capitalize on the dramatic growth happening in video as our customers and prospects assume a new normal that will be — we believe, will extend far beyond the COVID-19 pandemic; to stay laser-focused on solving tough problems related to video in the enterprise; to maintain customer retention above 90% for the year; to continue to innovate on our enterprise video platform and realize all defined opportunities; to grow and monetize our existing channel by building upon established partnerships with BT and others; execute on our direct sales strategy and continue to expand our footprint within existing customer base, while bringing net new customers within our defined markets; and finally, to improve our financial results, building on our strong business fundamentals.”

  4. 88Apple

    Hey Dave-I, too, found CEO Hanlik’s lack of merger discussion a conspicuous omission. I suppose as the target, he felt it best to keep silent, out of respect and consideration for Synacore. Another possibility is, he is looking to greener pastures, knowing that in a pandemic world that his franchise is worth several times its current market cap.

    Ultimately, I hope the merger goes through, but I would not be too surprised if Qumu finds a new participant, one that pushes the merger price up, in a meaningful more than way.

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