Nice work if you can get it. Barron's on OTCBB reverse mergers: "Let's Make a Deal. Who are the real winners when ailing U.S. companies merge with Israeli start-ups?
By Jacqueline Doherty and Bill Alpert
How does a tiny company on the verge of being delisted from Nasdaq
suddenly boast a market capitalization of almost $1 billion? A group of U.S.
investors and Israeli companies have discovered a cookie-cutter formula for
such financial success, and they've used it three times. Involved in each deal
are David Bodner and Murray Huberfeld, investors with checkered pasts.
Also figuring in each transaction, directly or indirectly, are David Rubner, the
former head of ECI Telecom, one of Israel's largest telecom companies, and
Rabbi Irwin Katsof, executive vice president of the Jerusalem Fund of Aish
HaTorah, a prominent Jewish charity.
Here's how it works: A struggling publicly traded U.S. company with few
shares outstanding issues millions of new shares to acquire a foreign company
with little operating history and no reported profits. The U.S. company's
shares rise as press releases promote the acquired company's technological
prowess. If the technology companies succeed, all will make money. But even
if the shares subsequently fall to $2 or $3, company insiders could reap
millions because of the huge blocks of cheap shares they own.
Broad Capital, Bodner and
Huberfeld's New York City-based
investment firm, appears to have been
instrumental in these deals, commonly
called "reverse mergers" or "reverse
acquisitions." (Neither Bodner nor
Huberfeld returned our calls for
comment, nor were they in when we
visited their plush West 57th Street
offices last week.) True or not, one
thing is certain: Their wives, Naomi Bodner and Laura Huberfeld, own large
blocks of stock in the one deal that has progressed far enough to require
disclosure of shareholders. Indeed, their holdings of Multimedia KID are
worth $7 million each, despite the recent collapse in the value of its shares, to
2 1/16 from a high of 7 7/8 in February.
The three U.S. companies involved in these reverse mergers with Israeli tech
firms are Western Power & Equipment, a distributor of heavy equipment,
Sensar, known as a maker of measuring devices, and Jenkon International,
which once made software for marketing and direct-sales companies. Last
year, the shares in all three companies traded as low as 1 1/2. In April,
Western Power & Equipment had a $14.9 million market cap. In October
1999, Sensar was valued at $18 million, and in August 1999, Jenkon was
worth $9.8 million.
Each has now completed, or is completing, a reverse acquisition. In April, for
example, Western Power struck a deal with e-Mobile, which hopes to
produce handheld devices to access the Internet. Western's shares rose to a
high of $10 on May 1, ballooning its market cap to $553 million. Recent
price: 6 11/16.
In October, Sensar struck a deal to merge with Net2Wireless, a company
that plans to compress data so that cellular operators can offer high-speed
data transmission and access to the Internet on existing phones and other
communications devices. Sensar shares rose as high as 89 7/8 in March,
giving it a $3.9 billion market cap at the time. Recent price: 22 1/8.
In December, Jenkon completed its reverse acquisition with Multimedia KID,
which develops interactive learning software for children and adults, and its
shares rose to 4 9/16. They continued to climb to a high of 7 7/8 in February,
for a $269 million market cap. Recent price: 2 1/16.
No Scrutiny
For years, private companies have done reverse acquisitions with public
companies, to gain access to the public market. But the method sometimes
raises warning flags because it allows the private companies to circumvent the
scrutiny linked to an initial public offering.
But Nechemia Davidson, chief
executive of Net2Wireless and the
founder and chairman of e-Mobile,
insists that this isn't the case with any
transaction he's involved with. He
says the reverse merger will allow the
participants to access the public
market quickly. "We have a very
strong window right now because we
have a very strong technology," he
says. Being public, he adds, will allow
his company to offer employees stock
options and thus attract the best
people.
Perhaps. But the bona fides of
financiers Huberfeld, 39, and Bodner, 43, don't exactly inspire confidence.
Two years ago, the Securities and Exchange Commission alleged that the pair
had covertly received over 513,000 shares of restricted stock as collateral for
a loan to a director of a company called Incomnet. The two immediately sold
the shares in the now-bankrupt long-distance reseller for a profit of about
$3.7 million, in violation of securities laws, according to the SEC complaint.
Broad Capital also was cited for failing to disclose, as required by law, that it
held over 5% of Incomnet's outstanding securities. Broad, Huberfeld and
Bodner settled the case without admitting or denying the SEC's allegations
and were ordered to disgorge their profits, plus interest, which together
totaled $4,649,125. Civil penalties also were imposed: Broad was ordered to
pay $50,000; Huberfeld and Bodner, $15,000 each.
As a result, the pair were automatically "statutorily disqualified" from working
for a broker licensed by the National Association of Securities Dealers.
Huberfeld and Broad Capital had another brush with the law in 1996, when
they were targets of an SEC administrative complaint related to Wye
Resources, a heavily promoted Canadian firm that claimed interests in various
gold- and diamond-mining properties. "Broad Capital was aware of, and
participated in, Wye's promotional efforts in the United States," the SEC
alleged. The firm was also charged with buying unregistered shares of Wye at
a discount and mischaracterizing the purchase as a loan. Without admitting or
denying the commission's findings, Broad Capital and Huberfeld consented to
the issuance of an order finding that they violated Section 5 of the Securities
Act and they agreed to disgorge $426,790, representing profits made as a
result of the transactions in Wye stock plus interest.
And in 1992, Bodner and Huberfeld pled guilty in Federal court in Brooklyn,
New York, to possession of false identification with the intent to defraud. The
duo got snagged having imposters take the Series 7 securities brokers'
examination in their stead. Each was sentenced to a minimum of one year's
probation and fined $50,000.
Anatomy of a Deal
That doesn't seem to have slowed them, however. Consider the Jenkon
International deal, which the Jerusalem Fund's Katsof recalls was "made
available" to him by Huberfeld and Bodner. A little over a year ago, Jenkon
shares were trading at 1 1/2. Then, on August 26, the reverse acquisition with
Multimedia KID was announced. A Jenkon press release issued at the time
noted that Multimedia KID was "awarded the prestigious Computer Software
Award from the Office of the Prime Minister of Israel for the category of
Special Innovation and Invention in Education."
As part of the deal, Jenkon issued
840,000 common shares to
Multimedia KID shareholders, along
with preferred stock that converts into
an additional 24 million Jenkon
shares. If the preferred stock were
converted, Multimedia KID
shareholders would own 83% of
Jenkon. The deal later included a $4.5
million private placement of notes that
convert into 4.5 million Jenkon shares.
According to SEC filings, former ECI
Telecom chief David Rubner
consented to become non-executive
chairman of the newly combined
company at the conclusion of the deal. Rubner, who stepped down from his
post at ECI in February, had been with that Nasdaq-traded company since
1970 and was named chief executive in 1991. During his tenure as CEO, he
is credited with expanding ECI's revenues from $74 million to $1.2 billion.
Rubner also serves as chairman of Net2Wireless and, if the reverse
acquisition with Sensar is completed, he's slated to chair that combined entity,
as well. Rubner says he was introduced to Huberfeld and Bodner through a
friend, whose name he declines to reveal. He says he was unaware of the
duo's history with the SEC. "As far as shareholders are concerned, we cannot
check their history," he told Barron's.
Jenkon completed the reverse acquisition and the $4.5 million private
placement in December, and the Jenkon software business was sold to
executives in the predecessor firm. Shares of Multimedia KID hit a high of 7
7/8 February 14.
Press releases about the deal fail to reveal much about the business or its
finances. But according to SEC filings, for the six months ending June 30,
1999, about 44% of Multimedia KID's $747,743 in revenues came from
Romania, 33.6% from the U.S. and 19.8% from Israel; and 97.7% of the
company's sales during that period came from just three unidentified
customers. A more recent SEC filing shows that the company had a loss
before discontinued operations of $5.75 million and "generated only limited
revenues from the sale of products, services and marketing rights" in the nine
months ended March 31, 2000.
Earlier this month, Multimedia KID filed with the SEC to register 13,283,239
shares for sale. The shares result from the conversion of the preferred stock
and the private placement. The registration, which isn't yet effective, makes
for interesting reading. Listed as the largest shareholder is Zehava Rubner,
David's wife, who owns 6,818,606 shares, a 19.9% stake, valued at $14.1
million by today's market. Of her total holdings, 2,650,000 shares will be
registered.
Also on the shareholder list are
Naomi Bodner and Laura Huberfeld,
who each own 3,409,302 shares,
with a combined value of $14.1
million. Each will register 1,325,000
shares.
Another name on the shareholder list
is Robert DePalo, who owns 829,848
shares, all of which will be registered.
DePalo is chairman of Equilink, a
New York City investment firm,
which was an adviser on the
Multimedia KID deal. Says he: "By all
predictions, the company should be
profitable by the fourth quarter of this
year, based on information given to me by the CFO."
The highest profile name on the shareholder list,
however, belongs to Irwin Katsof, 45, who is
shown as owning 200,000 shares, half of which
will be registered for sale. Rabbi Katsof says some of those shares are owned
by the Jerusalem Fund, which he heads, and says the charity is also invested
in the Net2Wireless and e-Mobile deals.
Katsof prominently displays photos of himself with the likes of comedian Jerry
Seinfeld, former British Prime Minister Margaret Thatcher, boxer Muhammed
Ali and talk-show host Larry King in his midtown Manhattan office, across
the street from the Broad Capital offices. Indeed, Katsof is the co-author,
with King, of the popular book Powerful Prayers, which details the prayers of
the rich and powerful.
Katsof says that Bodner and Huberfeld "are among the top philanthropists in
the Jewish world." He adds: "David and Murray are known as upstanding
individuals. They're friends. I trust their judgment."
"Worth a Lot of Money"
The second deal, between Sensar and Net2Wireless, was announced on
October 7, 1999. Sensar, formerly known as Larson-Davis, had been
involved in the design, development, manufacturing and marketing of analytical
scientific instruments. Six months earlier, Sensar had executed a 1-for-5
reverse split and its board of directors resigned. Taking over as chief
executive was Howard Landa, a partner at Sensar's outside law firm. Sensar
then began selling off its various operations and looking for other acquisitions
or investments. During the September 1999 quarter it had no sales from
continuing operations, but held cash and cash equivalents of $3.17 million.
Then came the announcement that
Sensar would buy all the outstanding
shares of ITES, now known as
Net2Wireless. As part of the deal,
Sensar would issue 17 million shares
(adjusted for a subsequent split) to
ITES stockholders. Another million
shares would be given to unnamed
parties who helped structure the deal.
"Net2Wireless was introduced to us
by Broad Capital," says Sensar's
Landa. Broad, he says, had invested
in Sensar's predecessor and had
approached him with a number of
Israeli reverse-acquisition candidates.
Landa says he liked the technology
offered by Net2Wireless and met with
Net2Wireless CEO Nechemia
Davidson and Broad Capital in New
York City. "My first attraction to the
company was [David] Rubner
because of his experience with ECI
Telecom," says Landa.
Upon closing, Net2Wireless' officers,
including Davidson, will take control
of Sensar. Davidson, who told
Barron's he worked for Israel's
Ministry of Defense from 1987 into the mid-1990s and was involved with
communications, data compression and encryption, says. "I searched for
capital, and I met David Rubner, who was head of ECI." He adds that
Rubner knew the U.S. investors and introduced him to Sensar. Davidson
insists he knows nothing about Huberfeld's and Bodner's past run-ins with the
SEC. "They're not active shareholders," he says. "It's David Rubner who's
important."
Net2Wireless is developing a technology to compress data and transmit it
wirelessly. Its hope is that cellular phone companies will buy its equipment to
transmit video and the Internet over today's existing second generation, or
2G, devices. Most analysts don't expect wireless systems to be able to offer
such services until 3G equipment is deployed, sometime in the next two to
three years.
Sensar's shares started moving north after it announced that ITES had entered
into a development agreement with Partner Communications, the Israeli
affiliate of Orange, the British wireless operator. Net2Wireless will test, at its
own expense, its streaming multimedia platform on Partner's system. In return,
Partner received an option to purchase 7% of the company's outstanding
stock at an exercise price of $5.5 million. At today's price, those shares
would be worth about $67 million.
"It is in the first stages of testing, but we have not been disappointed," says
Dan Eldar, vice president of carrier and international relations at Partner. One
Partner unit is currently helping 12 startup companies to develop technology.
And on Thursday PelePhone Communications, an Israeli cellular carrier, said
it had installed Net2Wireless' technology and would begin pilot testing.
In late March, Net2Wireless completed a $29 million private placement of
preferred stock, which is convertible into 1,041,140 Sensar's shares. At that
point, Sensar decided to exercise its option to acquire Net2Wireless and
slightly increased the shares involved. Sensar will issue 18,295,060 shares
and options for 14,766,649 shares in addition to the split-adjusted one million
shares used to pay an introduction fee. When all is said and done, the
combined company will have just over 43 million shares outstanding on a
diluted basis. Net2Wireless investors will own 65% of the new company.
Those investors, along with Partner, have options to boost their ownership to
77%.
Shareholders were slated to consider the merger on June 16, but the
company hasn't released any news to that effect. The combined entity will be
dubbed Net2Wireless, and Davidson will take over.
Net2Wireless lost $493,178 between April and December 31, 1999,
according to its most recent SEC filing. Yet at Sensar's current share price,
the merged entity would boast a market value of $953 million. Is it worth it?
"It's worth much more than that," effuses Davidson. "Content is the future."
David Rubner sounds equally confident. "Net2Wireless is a company that's
worth a lot of money," he explains. "It will revolutionize the cellular industry."
Who's on First?
The most recently announced deal we found with a Bodner/Huberfeld
connection involves Western Power & Equipment, a struggling
heavy-equipment distributor. Results for the quarter ended April 30 show
revenues of $35.3 million, down 13% and a loss of $947,000, or 29 cents
per share, compared with the prior year's loss of two cents. At the company's
annual meeting in February, two of Western's incumbent directors resigned
and two new directors were elected. Two months later, on April 18, Western
announced plans to merge with e-Mobile, a startup developing a small,
expensive wireless device, like a Palm organizer, that enables users to retrieve
and display voice and data. On that day, Western's three million shares closed
at 4 1/2 .
Western Chief Executive Dean McLain explains that the company didn't have
the money to expand its existing business, so it started looking for ways to
merge, do a buyout or sell the company's shell. He adds that Robert M.
Rubin, a Western director and the company's largest shareholder, knew the
folks at Equilink, which was trying to bring e-Mobile public; Broad Capital,
McLain says, is involved in raising $7-$8 million in a private placement, which
is part of the deal.
McLain says he's never met with anyone from e-Mobile and Rubin has met
only with Nechimiah Davidson. "We're relying on our board and Equilink to
keep us updated," said McLain. Barron's was unable to reach Rubin for
comment.
Davidson, for his part, says: "I'm not involved with the details [of e-Mobile].
I'm very busy with Net2Wireless."
He suggests speaking with Eytan Ramon. Ramon, in turn, told Barron's he
was still on the job at Motorola, where he says he has worked for 17 years.
He assured us, however, that two people now labor fulltime at eMobile,
identifying market needs and working on the technology. "We think we have a
big thing on our hands," he maintains. On Thursday, the company announced
that Ramon had been named chief executive of e-Mobile.
On such hopes now rest a potential market cap of $380 million, based on the
current price and the 52 million new shares that Western will issue to
purchase e-Mobile, plus the three million shares now outstanding. (Western's
management and directors will buy Western's heavy-equipment business for
$4.7 million.) So far, Western hasn't disclosed any financial information about
e-Mobile in press releases or in the SEC filings. Nor has it submitted the letter
of intent for the reverse acquisition to the SEC. So, the investors in e-Mobile
haven't been publicly disclosed yet. That said, Katsof observes that the
Jerusalem Fund is in the deal. And Rubner tells Barron's that he, his wife or
his children are invested in all three of these transactions.
Nice work, if you can get it." |
