Will look to add to our long position of MERU ($4.16) if shares fall hard

Yesterday, we issued an alert to GeoInvesting Premium members that we were taking a speculative position in MERU due to some initial due diligence, combined with 13/D filing clues that lead us to believe that the company is an ideal takeover candidate.  Yesterday after the bell, MERU reported weak 2014 Q3 financial results.

Although no acquisition deal was announced, our bullish sentiment and buyout thesis towards MERU is still intact. In addition to reasons we originally touched upon in support of our opinion, here are more reasons we like the opportunity:

  • Two companies that play in the same space have been acquired during the last 11 months: MSPD at an EV/S of 1.6 and PLXT at an EV/S of 2.7.
  • MERU 13/D filer (with representation on the board) Potomac Capital Management III LLC had invested in PLXT (with representation on the board) 18 months before it was acquired. It has been almost 11 months since Potomac disclosed its stake in MERU via a 13/D on 12/4/2013.  Given some of the commentary by a second activist investor in MERU, Castle Union, we speculate that an acquisition transaction could occur soon.
  • Potomac seems to have a knack for investing in companies that become acquired – we believe, based on their board presence, they could be an activist catalyst behind such a transaction taking place in MERU.
  • 13/D Filer Castle Union is putting pressure on the company to sell itself. This is an excerpt from a Castle Union letter to shareholders:

Time is of the essence and the time has long since passed for the Board to take proactive steps to maximize shareholder value. We do not believe Meru should remain an independent company and the Board must immediately commence a sale process.

The chasm to significant profitability is too wide to cross and this leaves the Company with no viable path out of its unprofitable subscale purgatory other than a sale to a strategic acquirer.

  • Castle Union gave its support to only two board members, who both happen to be directors at Potomac.

As a major shareholder, we cannot stand idly by while the Board repeatedly fails to take the appropriate actions to maximize shareholder value. We will withhold our votes for all Board nominees except Eric Singer and Stephen Domenik at the Company’s annual shareholder meeting on May 22, 2014.

We will look to add to our position if shares fall in reaction to the company’s weak Q3 results.  We think that weaker financial results could potentially put more pressure on the board to sell the company.  We will have more in a later update on the economics of the potential transaction and why it makes sense for MERU to sell to a larger company.