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This article covers a microcap stock. Please be aware of the risks associated with these stocks.

Several positive catalysts have occurred at Overland Storage (NASDAQ:OVRL) in the last 30 days:

  • They entered into a definitive agreement to acquire Tandberg Data Holdings, a privately held global leader of data storage and data protection solutions by issuing common stock. The acquisition is expected to be completed by the end of December 2013, subject to customary closing conditions and approvals. The holders of Overland's convertible notes converted $10.7 million of the notes into shares of common stock at $1.30 per share.
  • The company received gross proceeds of $7 million from the sale of additional convertible notes.
  • Overland released SnapScale X4, a clustered NAS product that is designed to provide a high-density solution to more efficiently manage growing amounts of unstructured data.
  • They amended their San Diego lease reducing square footage, resulting in an annual savings of over $1.2 million after February 2014.

So why haven't the shares moved up?

Well, if you look at the tax loss selling filings of Special Situation Fund you will see the obvious reason. Special Situations (the MAXRE/GREENHOUSE listing in the above link) has been doling out their position preventing the stock from moving higher.

All of that changed last Friday. The management team was so confident about the transaction that they, along with a few hedge funds, some new to the name, bought the entire remaining block from Special Situations. That's 2.5 million shares! Look online and you will see the trade on Friday, November 22. While trading at around $.85 for most of the day, the stock moved up once the big block hit the tape and it closed at $.94. The overhang is now gone! How confident must the insiders be to shell out another $2 million plus into the name at this price level? We expect Overland to now move up to fair value - well above a dollar before the end of the year and to $2 - $3 over the next twelve months.

Think about it. Cyrus had $12 million of convertible notes in Overland paying 8% annually and convertible to common stock at $1.30. As part of this deal, they agreed to convert the notes immediately at $1.30. The stock was trading at $.85 - $.90. Why would they agree to convert at $1.30 now (and foregoing future interest payments as well) unless they saw tremendous value here?

Cyrus (and partners) invested $15 million in Overland less than 1 year ago and are investing $7 million now for a total of $22 million (in addition to its investment in Tandberg). Overland's market cap is only $29 million. Why would they do this if they felt Overland wasn't worth at least double the current market cap?

Overland Storage announced on 11/1/13 that it entered into a Definitive Agreement to acquire Tandberg Data Holdings, a company owned by private equity firm Cyrus Capital. Based upon information in the preliminary proxy statement, the combined companies should generate approximately $110 million of revenue in 2014, and be EBITDA positive net of charges related to integrating the two companies. Shareholders of each company will initially have 50% of the equity, however, upon voluntary conversion by Cyrus of its $1.30 convertible bond, Cyrus will own 63% of the combined entity, and have 2 Board seats. This is great news because we surmise that Cyrus wanted a public entity to begin its aggressive acquisition grab. Our discussions with Cyrus lead us to believe that it regards the new Overland as a platform to scale up via acquiring additional companies, eliminating duplicative costs to leverage profitability, and growing the company into a much larger company which will be sold. We are confident that Cyrus will succeed.

There is excellent synergy between the two companies in both products and customers, and the combined entity will have a truly global presence. Overland's strengths in clustered NAS storage, scale-out NAS storage and tape automation complement Tandberg's strengths in RDX removable disk cartridge, tape drives and media, and RDX licensing business. Where Overland's business is concentrated in the U.S. SMB market, Tandberg has a strong presence in Europe and a cost-effective manufacturing base in China. In addition, the partnership with Sphere 3D has the potential to significantly increase revenue and profits with new products being launched starting in Q1 2014.

The new $7 million convertible loan from Cyrus should more than cover integration related costs including closing facilities and severance packages. The company had about $7 million of working capital on the most recent balance sheet, and about $4.5 million available under its line of credit with Silicon Valley Bank. Tandberg itself is debt free. Therefore, we believe the company is more than adequately capitalized to support anticipated growth, and that no new equity needs to be issued. Cyrus would not invest so heavily in this deal unless the funding was in place to see it through.

Valuation

If we compare the valuation to similar public storage companies, in our opinion Overland is currently 50% undervalued. After the integration is complete and the income statement shows a significant profit the company at this price is 66% undervalued. Price to Sales valuation is just 0.75 based on previous 2014 revenue guidance; and 0.50 based on the our expected 2014 revenue $120 million . Compare this to Qualstar Corp (NASDAQ:QBAK), with Price to Sales valuation of 1.27. Compare to Imation's (NYSE:IMN) recent acquisition of Nexsan at 1.5 x Sales ($120 million). Compare to HGST's [a subsidiary of Western Digital Corp (NASDAQ:WDC)] recent acquisition of STEC at 1.4 x Sales.

In addition, the Tandberg/Overland combination has assets that competitors are sorely lacking. The investment in Sphere 3D is worth $3 million alone. Roth Capital recently doubled their price target for Overland from $1 to $2 based on this deal. They clearly see the opportunity here and so do we!

Source: Overland Overhang Gone, A Big Block Bought By Insiders