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As liquidity events go, the just-announced sale of Kana Software (KANA) is shaping up to be a pretty dry one for most shareholders. The customer service automation vendor said on Tuesday that it plans to sell its operating business to buyout group Accel-KKR for $49m and retain the publicly listed shell of a company as an acquisition vehicle. The proceeds from the sale of the business will flow to what essentially amounts to a special-purpose acquisition company, or SPAC, rather than long-suffering Kana shareholders. Shares of Kana have barely moved since the announcement, holding steady at around $0.75 each.

From our view, the structure of the deal reflects a creativity born out of necessity. Essentially, the challenge that shaped the sale process at Kana, which has been playing out for several years, was how to realize value for a decidedly mediocre operating business, while at the same time preserve the value of the tax advantages accrued from having burned money ($4.3bn and counting) since the company opened its doors. (The sole ‘asset’ at the SPAC, besides access to the capital markets, is the $400m in credits to offset taxes on any profit generated at whatever company it does acquire.) While the deal goes some distance toward satisfying both goals, several disgruntled shareholders have charged that it doesn’t go far enough.

For starters, the shareholders point out that if the carve-out goes through, as is expected within three months, they will have nothing to show for the sale of ‘their’ company. Instead, their future returns will be determined by an unknown group that may – or may not – buy some yet-to-determined business. (So much for the Wall Street maxim of investing in management and markets.) Particularly galling to those shareholders stuck holding illiquid Bulletin Board equity is that two of the largest owners of Kana (hedge funds KVO Capital Management and Nightwatch Capital Management, which also has a board seat) got to exit their investments at an above-market price of $0.95 per share, with the possible addition of another $0.10 for each share on top of that.

Kana would probably counter that shareholders who don’t want to roll their ownership of the company into a SPAC are free to sell their shares. And we have little doubt that the vendor exhausted every opportunity to get some value from the business, since we know that the process has been grinding along fitfully for years. In the end, though, we can’t help but view the less-than-ideal transaction as a fittingly imperfect ending to a thoroughly flawed company. Or more precisely, a thoroughly flawed public company. Red ink-stained Kana went public in 1999 on less than $5m in aggregate sales, but within a year of the offering had topped $1,000 per share on a split-adjusted basis. As shareholders now argue about dimes on the firm’s Bulletin Board-listed stock, the end of Kana just seems pathetic.

Source: Kana: A Fittingly Imperfect End