Shareholder/management activity, reduced selling pressure, recent strategic acquisitions and growth projects, and temporarily depressed margins create a great opportunity to buy
The wording of the contract amendments are interesting. Mr. Askarpour, CEO, seems concerned about being terminated without cause. Think about that.
If you were looking to acquire a company, then wouldn't you want to take ownership of a well run business by keeping the existing management? It's what Buffett does. Management comes first.
If Mr. Askarpour is concerned about being terminated post acquisition, does that suggest that there is tension between the majority shareholder and the board?
Why would that be?
An alternative interpretation is that Mr. Askarpour is putting his own personal interests before those of the company and its shareholders. He should want what is best for the business and if that means a change of ownership, so be it. But he seems concerned that the new owner would oust him.
The levels of stock based comp (RSU and PSU) relative to net income, and consequential shareholder dilution, also suggests that management is not motivated by what is best for shareholders.
Harborne's letter states, "I now firmly believe that the Company is not well positioned to achieve this long-term potential in its current configuration... [and if he acquired the business, shareholders would not be] subject to the significant operational and financial risks inherent in the Company’s business."
To me that sounds like he has no faith in the existing management being able to deliver on the company's potential.
Revenue has increased over the past few years, but at the expense of margins.
The CEO talks a good game, but there is tension here for sure. Either Harborne is right or the CEO is right, but they can't both be right. Since Harborne is putting his own money behind his belief, I am more inclined to believe his position than I am to believe a CEO who is self interested and tries to enrich himself with PSUs and RSUs and changes to his contract of employment.
I may be wrong, but something doesn't smell right here. I like to see harmony in a business between owners and management - not conflict. For me this isn't investing, it is speculating in the hope of a favourable outcome. Just my opinion - I may be entirely wrong, but I'll pass on this.
Hi James, thank you for the thorough comment! Btw, I enjoy your content a lot!
I see this situation as a combination of 5-6 different factors. If you look only at one piece, then the thesis is weak, but all of them together create a high probability of a nice upside with limited downside (in my opinion).
Concerning dilution, maybe you looked at the original 8-K. Firstly, I was shocked when I saw 2.1mln PSUs as a bonus. But then they issued a correction - it was actually 201.000. Not sure, if you meant this or not.
Also, these latest PSUs have vesting prices at $10, $12, and $14 (50%-100% above the current market price). So, if the CEO is not able to increase the value of the company or sell the company at a much higher price he also gets nothing from these new units.
Concerning Harborne, I think he wanted to be opportunistic in this case and saw a potentially good opportunity to buy a company for a low price.
Concerning margins, it really looks like there is temporary pressure.
There were another few factors, which I mentioned in the article and which reinforce the thesis.
All in all, I see quite a high upside potential and a very limited downside. Maybe Harborne and management are not 100% aligned, but you can rarely find a situation that is perfect from every angle. In my opinion, there is still a 90% probability of a good outcome.
There is something that just doesn't sit well with me at the moment.
I would rather watch from the sidelines, see how it all pans out, and maybe invest in the future.
On the basis that investing is about risk adjusted returns, an entry at a later date, even at a higher price, may be a better move if the risk is significantly reduced.
Gold this one, like $GTX report! Thanks Maksim for the work! Hope you Keep doing it. Free or not, I'll be here to suport.
Wow ,thank you so much for the support!
Do you think ISSC has any chance to return some capital via buyback or dividends?
I don't think so. They concentrate on reinvesting either in organic growth or acquisitions.
The wording of the contract amendments are interesting. Mr. Askarpour, CEO, seems concerned about being terminated without cause. Think about that.
If you were looking to acquire a company, then wouldn't you want to take ownership of a well run business by keeping the existing management? It's what Buffett does. Management comes first.
If Mr. Askarpour is concerned about being terminated post acquisition, does that suggest that there is tension between the majority shareholder and the board?
Why would that be?
An alternative interpretation is that Mr. Askarpour is putting his own personal interests before those of the company and its shareholders. He should want what is best for the business and if that means a change of ownership, so be it. But he seems concerned that the new owner would oust him.
The levels of stock based comp (RSU and PSU) relative to net income, and consequential shareholder dilution, also suggests that management is not motivated by what is best for shareholders.
Harborne's letter states, "I now firmly believe that the Company is not well positioned to achieve this long-term potential in its current configuration... [and if he acquired the business, shareholders would not be] subject to the significant operational and financial risks inherent in the Company’s business."
To me that sounds like he has no faith in the existing management being able to deliver on the company's potential.
Revenue has increased over the past few years, but at the expense of margins.
The CEO talks a good game, but there is tension here for sure. Either Harborne is right or the CEO is right, but they can't both be right. Since Harborne is putting his own money behind his belief, I am more inclined to believe his position than I am to believe a CEO who is self interested and tries to enrich himself with PSUs and RSUs and changes to his contract of employment.
I may be wrong, but something doesn't smell right here. I like to see harmony in a business between owners and management - not conflict. For me this isn't investing, it is speculating in the hope of a favourable outcome. Just my opinion - I may be entirely wrong, but I'll pass on this.
Hi James, thank you for the thorough comment! Btw, I enjoy your content a lot!
I see this situation as a combination of 5-6 different factors. If you look only at one piece, then the thesis is weak, but all of them together create a high probability of a nice upside with limited downside (in my opinion).
Concerning dilution, maybe you looked at the original 8-K. Firstly, I was shocked when I saw 2.1mln PSUs as a bonus. But then they issued a correction - it was actually 201.000. Not sure, if you meant this or not.
Also, these latest PSUs have vesting prices at $10, $12, and $14 (50%-100% above the current market price). So, if the CEO is not able to increase the value of the company or sell the company at a much higher price he also gets nothing from these new units.
Concerning Harborne, I think he wanted to be opportunistic in this case and saw a potentially good opportunity to buy a company for a low price.
Concerning margins, it really looks like there is temporary pressure.
There were another few factors, which I mentioned in the article and which reinforce the thesis.
All in all, I see quite a high upside potential and a very limited downside. Maybe Harborne and management are not 100% aligned, but you can rarely find a situation that is perfect from every angle. In my opinion, there is still a 90% probability of a good outcome.
Thanks for your reply.
There is something that just doesn't sit well with me at the moment.
I would rather watch from the sidelines, see how it all pans out, and maybe invest in the future.
On the basis that investing is about risk adjusted returns, an entry at a later date, even at a higher price, may be a better move if the risk is significantly reduced.
My thinking is best summed up in this post: https://rockandturner.substack.com/p/thinking-like-pabrai-marks-and-buffett
If you decide to invest now, I hope it works out well for you.
Thanks James ! For me it's Pabrai's "heads I win, tails I don't lose much" situation