Investors should beware. There's no such thing as a free lunch, no matter how much leftover Thanksgiving turkey there is. When there's supposedly a buyout offer that's hundreds of percentage points higher than the current stock price, in any situation, the market is telling you loud and clear -- run don't walk.
KIT Digital (KITD) dropped a bomb on shareholders Wednesday after hours announcing that all of their financial statements for nearly the last 4 years can't be relied on, will have to be restated, and don't expect an earnings report or conference call any time soon. Then, in an interesting twist to the plot, the former CEO, Kaleil Isaza Tuzman, in a long emotionally charged letter belittling current management made a proposed making a buyout offer at the end for $3.75 per share. Sounds like a free lunch. Don't bite.
(1) TERRIBLE FINANCIAL PERFORMANCE
The reported financial performance for KITD has been terrible long for a long long time. Who is going to want to buy it out now of all times? The tangible book value is negative, if even that can be trusted. Who knows if their balance sheet will have to be restated as well? The company will almost certainly face delisting from the NASDAQ and likely undergo an SEC investigation and class action lawsuits, both of which will be quite expensive on legal fees alone and cost them cash they simply don't have. Why would anybody really want to buy into this mess at such a lofty price?
(2) POSSIBLE FRAUD
It's possible that this "buyout offer" is an attempt to hide the misdeeds of former management themselves! While I make no accusations, it wouldn't be the first time somebody who behaved badly attempted to cover it up and show faith by declaring the share price undervalued. Anybody remember Dennis Kozlowski and his 1 million share buy of Tyco (TYC)? Mr. Kozlowski continues to sit in a prison cell every day.
(3) HALLOW OFFER
The devil is usually in the details. The key words to watch out for in this offer is "Based on our analysis of publicly available information, and subject to due diligence." Based on public available information? That information is not reliable. The company already told us that. Which makes any offer a hallow one at best easily retracted with an inferior offer made if any at all.
(4) NO MONEY OR GROUP TO EVEN MAKE THE OFFER
Once again, the devil is in the details. From the press release: "we are prepared to lead a bidding group." This is implies that there is no bidding group. They are merely "prepared" to lead one. No group exists yet. No group -- no money. No money -- no credible buyout offer.
But there's this "We have reviewed this transaction with two large private equity groups who are interested in participating with us." Meaningless. Anybody can say they are "interested" in hearing details. That's what private equity groups do -- they hear details on dozens of deals and select maybe 1 or 2. I highly doubt they'd be interested in this thing at that proposed price.
(5) HISTORY OF FAILURE
Former CEO Kaleil Isaza Tuzman is no stranger to failure. Prior to his founding of KITD, he founded a company called govWorks with $60 million in venture capital. 3 years later it was bankrupt. His short resume of companies doesn't exactly scream "join me" to private equity groups these days, especially in making buyout offers for a money-losing company restating nearly 4 years of financial statements and warning via implication that it will be struggling merely to survive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.