Zitel - Inept management or deliberate fraud? Message Board

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Technology Stocks : Zitel - Inept management or deliberate fraud?

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To: Bill Wexler who wrote (6)	5/26/1997 11:07:00 PM
From: E Rosen	of 67

Apropos of your last point: >> Why is Matridigm's 5 million dollar investment worth a third of a billion overnight? And if I ran a venture capital firm and I really believed in this Y2K stuff, why wouldn't I simply make an investment directly in Matridigm instead of buying Zitel's worthless shares? << Presumably before issuing the $25 million subordinate debenture which is so disadvantageous to shareholders, Zitel's management tried and failed to make deals that would have been less damaging. Apparently they could not borrow the money at an acceptable rate, and a secondary offering was impossible. But it is also clear that they either couldn't (or didn't try to) sell part of their Matridigm stake. If any institution believed MD to be worth anything close to its implied valuation, Zitel could have sold less than 10% of its holdings, and ended up with $25 million free and clear - no interest payments and no convertibility. If they do believe MD may eventually pan out, they must try not to go out of business before that time; otherwise the MD holding would be in someone else's hands at the time the cash flows. Selling part of their stake would have extended their survival further and more securely, and resulted in more of the stock left in their control at that time (obviously, if MD did pan out, the shares would be converted). Of course, there is no way MD will ever justify its current implied valuation, and Zitel could not find any believers. They have no choice but to hope MD pans out since their survival hangs by that thread, but no one else has that motivation.

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