Schafer: Analysts deal reflects reality for smaller public companies

The investment manager Heartland Advisors appears to have gotten a win when Analysts International followed its suggestion and gave up efforts to remain independent. A firm called American CyberSystems Inc. is acquiring Analysts in a $35 million deal.

But Heartland is a Milwaukee value investor, not some aggressive New York hedge fund, and its shareholder activism is of the gentlest sort. Maybe give credit to Heartland for a nudge, because all it really did was point out the obvious — that continuing to own a piece of a small public company with limited growth prospects and a deflated stock was aggravating.

There's no better example of its kind of softball shareholder activism than the conversation that took place last November on a quarterly investor conference call, when Heartland's Jason Schacht asked Analysts CEO Brittany McKinney what benefit she saw in being publicly held.

"And given the stagnant share price," Schacht continued, "what needs to change before you would think about strategic alternatives that would maybe make this a private company or a piece of a larger company?"

It's impossible to know from a transcript, but it's easy enough to imagine this scene: McKinney, seated next to a speaker phone in an Analysts conference room with her chief financial officer, hears Schacht's question. And sighs.

They had had this conversation before.

"I will say, just part of our normal management planning process, we're always looking at all of our strategic options," McKinney responded. "It is a complicated space to be in being the size we are and a public company. However, we are and we look at those options."

The reason these companies languish is not due to management and board complacency, but not having that many good options. "They are kind of locked in," said Tom Niemiec, a longtime Twin Cities investment banker and consultant. "I don't think they are locked in by choice."

So why not just sell? Activist shareholders badgering management might not buy this, but the hesitation to do so is also about shareholder value. Selling at a low price, is, well, selling at a low price. The valuation on an exit would be so much greater after even a year of significant growth.

And that's what Analysts tried — for years.

Analysts, based in Edina, is an information-technology consulting company that in its heyday was a leading provider of programmers and other technical staffers to go work at its clients' facilities.

Neither Heartland, which owns 9.3 percent of Analysts, or the company would discuss this situation. I did reach Fred Lang, who founded the company in 1966 and led it to more than $600 million in annual revenue and a market capitalization in excess of $800 million by the late 1990s. He explained that he only merged it with a public shell company to get on the public market because he wanted to use stock options to attract hard-to-find programmers. "And it worked rather well," he said.

With revenue well down from its fiscal 1999 peak, Analysts in early 2005 announced a merger of equals with New Jersey-based Computer Horizons.

Its shareholders overwhelmingly supported the deal, but Computer Horizons had some aggressive activists among shareholders who not only voted down the Analysts merger, they then ousted its board and approved a plan of liquidation.

After that stinging rejection, Analysts said it was optimistic going ahead alone, but it never quite found the right formula. What McKinney was pursuing was a plan she called "simple," and it was, if put up on a white board. She wanted to pursue large accounts she called "strategic," focus on geographic areas where Analysts had a strong presence and sell more application-based services that had higher billing rates and margins.

The thing is, her plan was not that different from what had been tried already.

If returning the company to profitable growth were easy, Jeff Baker would have done it, rather than leaving the company in early 2007 after a little over a year in the CEO's job. Or Elmer Baldwin would have, before leaving under pressure in late 2009. Or Andrew Borgstrom, who then gave the CEO job about nine months.

And it turns out that the nudge from Heartland was enough for McKinney and the board to seek a buyer.

In a filing made last week recommending that shareholders tender their shares, Analysts explained that in December's regular board meeting, McKinney went through the list of issues related to the company's relatively small size. It was covering ground she and her directors had covered before.

This time, though, she also reported that the day before, Heartland in a Securities and Exchange Commission filing had urged them to please find a buyer.

Within weeks the investment banking firm of Cherry Tree & Associates was looking at Analysts' options, and at the end Analysts' board settled on American CyberSystems.

At a price of $6.45 per share, when the deal closes it will be far less than the valuation in the 2005 failed merger and a small fraction of the all-time peak valuation reached in early 1998. At a 62 percent premium to the average price over the previous 30 days, however, and given the history of the last decade, perhaps the best way to describe the transaction is with the word Lang used.