James, grab a cup of coffee, this is a bit lengthy (apologies).
Back in the lean times when he was getting DRIV going, Mr. Ronning gave TSQD, qua MacUSA, a peppercorn option for his entire then interest in DRIV, 600,000 shares or 60% percent of the company; the other 40% being held by Fujitsu. Even given that TSQD was paying his salary, this might have seemed a very gentlemanly thing to do, but it also pumped up the share value of little TSQD over time, providing Mr. Ronning with needed personal liquidity, in that he could sell some of his shares of that company at much higher prices than before he granted it the option. And, given that he owned then some 67%+ of TSQD, such sales did not threaten his control of that company, especially as additional options were still flowing to him as he desired.
Since the DRIV IPO, holders of TSQD, other than Mr. Ronning, have despaired at the smaller company's share price which has not kept pace with mathematical models of a presumed proper intervaluation between TSQD and DRIV. If there are presently 11.4 million shares of TSQD outstanding, and its option is for 3.0 million shares of DRIV, each share of the former should control 26% of one of the latter. Ah, but don't forget the options to buy TSQD shares in the hands of its insiders: how many such options are there? How many indeed! Read all of the SEC documents filed to date, and tell me if you can. Say the number is 4.6 million, giving a total of 16 million which could be issued, and the above percentage drops to 19. Then again, there is nothing to prevent Mr. Ronning from issuing endless additional options to himself and his chosen, diluting, ad nauseum, the portion of the DRIV option value held by outsiders. Such considerable uncertainty provides the primary reason for the lack of constancy in the price relationship between the two stocks.
Now, with the ascension of DRIV, the option arrangement itself has become unwieldy, and needs to be converted in some fashion. I expect Mr. Ronning would agree, as both the largest shareholder of TSQD and the CEO and driving force of DRIV. He owns 3 million shares of DRIV worth $150 million today, and subject to a peppercorn option in favor of a company he presently owns as to 50%: exercise the option and the value of his interest is cut in half. If he first exercised his existing options in TSQD, he would own probably 65% of that company, at some cash cost. He still takes a major haircut when TSQD exercises as to DRIV. While this was his intention when he extended the option, he surely wants to retain today as much of the DRIV value for himself as possible, i.e. maximizing continuing options in TSQD and, most importantly, avoiding paying taxes to whatever extent possible.
Moreover, putting the money aspects aside, the existing arrangement is still awkward. Lately, TSQD has taken to booking the value of its option in its financial statements, complete with tax provision. As DRIV increases in value, these entries make the surrounding operational score-keeping on the Mac business look pitiful, even out of place. Recently, TSQD exercised as to 200k shares of DRIV and sold them in the secondary. A press release left the impression that the tax consequences would be minimal, owing to prior, offsettable losses. The year-end value of the remaining DRIV holding was $106.5 million. Today, seven days later, it is over $150 million. The tax provision should presently be $55-60 million . Does anyone really suggest that this option be exercised and the shares sold to “enhance” TSQD shareholder value? There would be riots in Eden Prairie! Better to find a way to distribute the DRIV option value while minimizing the tax cost of doing so.
The following suggestion may not be palatable to Mr. Ronning and his associates, but might provide the grist for grinding other, ultimately acceptable, solutions. I believe DRIV could acquire TSQD in a share swap transaction. First, shut down the options window at TSQD, allowing existing grants to be exercised, and arrive at a fixed number of outstanding shares in that company. Then, sell or spin off the Mac business, and value the remains of TSQD for what it would then own, i.e. an option to buy 3 million shares of DRIV, plus the net proceeds from the Mac transaction, if any. TSQD shares would be swapped for the calculated number of DRIV shares in a closing in which TSQD simultaneously relinquishes its option in DRIV, unexercised. The consideration to TSQD for the relinquishment is the DRIV shares received by its shareholders. Taxes would come due upon the subsequent sale of such DRIV shares by such former TSQD holders, not upon their receipt, assuming the transaction could be properly structured. The number of shares DRIV would issue to make the swap would probably just about equal those (already outstanding) subject to the option, i.e. the float would increase, but no dilution would result.
Obviously, the above would hinge on tax rulings for success, or perhaps tax experts would reject it even as a possibility. But, this is the sort of thing Mr. Ronning needs to push his TSQD advisers to work on. He should take steps to stabilize the TSQD/DRIV valuation at the very least. He should also end the ballooning effect on TSQD's books occasioned by the option if this small operating company is intended to have a future of its own. Merger may be the answer.
Good Luck to All
David |
