While it's quite evident that the headline grabber in the July 3rd press release was the change in Audit Committee Chair and NQ Mobile (NYSE:NQ) considering the widening of scope of PWC's investigation, it's worth noting that some of the specifics of the press release indicate what directions the company is currently considering. While speculations run the gamut, this author believes that the company is positioning itself for a buyout or investment by a financial or strategic partner in the near future.
Let's look at the additions to NQ's Board and recent corporate actions:
Justin Chen - In addition to his years of experience in M&A and securities law, Justin was appointed as a Board Member and Chairman of the Audit Committee for Ambow Education. Justin joined Ambow after the allegations of fraud at Ambow and it appears he was initially brought on to assist with the attempted buyout by Barring Private Equity. Is the Ambow connection merely a coincidence or did management need his particular expertise in dealing with distressed businesses?
Max Yao - In addition to his experience as the CEO of a public company, Max Yao has an extensive background in startups and nurturing young technology companies in the private arena. His achievements and qualifications speak for themselves, it's the background in private companies which is intriguing. Why would NQ, a public company, need someone with so much expertise in private technology companies?
Taek Kwon - While Taek is not a board member, his addition as an advisor is significant given his prior experience conducting buyouts and turnarounds as a Managing Director with TPG Capital and prior Corporate roles. In addition, Toro's investment in and commitment to seeing through his investment in NQ aligns his interests with shareholder interests in generating shareholder value. Is this just pandering to shareholders by NQ or is there a specific reason why Taek Kwon was chosen over a representative from one of the larger institutional holders?
Shareholder Representation (Independent Director) - This opening is certainly interesting. As a public company, I would expect one of NQ's existing major shareholders to hold representation for this seat. It could be that one of NQ's institutional investors will eventually take this role. Alternatively, this opening could also represent the eventual seat a material investor is demanding (private equity or strategic investor). Why become so shareholder friendly unless you are trying to attract a new shareholder?
The partial sales of Feiliu and NationSky - While the market reception to these moves was generally mixed if not negative, the intent to unlock value via a sum of the parts sale of subsidiaries further lends credence that the company is open to selling itself or has been indirectly trying to guide value for potential suitors.
While I will refrain from speculating on what fair market value is, the management team has repeatedly stated that NQ was undervalued, even when NQ was trading in the mid teens. Shareholders should recall that the balance sheet has a net cash position of ~$160M (pro forma for FL Mobile and NationSky sales) and that management owns ~40% of the common stock and ~75% of the voting power. Any acquisition of NQ will require management's acceptance of fair market value. An offer, assuming it was viable, would immediately see the share price for NQ accrete towards the offer price. The excess cash on the balance sheet alone would imply we are near the floor in terms of valuation.
Issues to Consider
Departure of Ms. Ying Han - While any departure is a red flag, there are some unique circumstances surrounding her departure.
- The Independent Committee (IC) results were completed under her watch and were for the most part clean.
- The expansion of the audit, as requested by PWC, would likely be a significant amount of work on top of the work already done as part of the IC. At ~60yrs old (sorry Ms. Han), she is nearing retirement, has her own company to run, and has been under an enormous amount of pressure for the last 9 months. Seeking an exit, while untimely for NQ shareholders, is well within her rights.
- There were no disagreements between her or NQ.
- PWC remains NQ's auditor despite her departure.
- Her succession was planned as her replacement was found prior to her departure.
"Considering" PWC's request - While this author personally believes NQ will accept PWC's requests, "considering" PWC's request is an open ended statement and clearly negatively interpreted by investors. NQ could just as well be negotiating with PWC to determine the exact parameters of the expanded audit as well as the amount of time necessary to complete the audit. Inclusion of the new audit chair in those discussions would probably be a good idea. The current investigation has gone on for nearly 9 months and the Company and investors are looking for resolutions and not a perpetual investigation. Another point of consideration is that any buyout will likely require audited financials as part of the financing proposal. It is however worth noting that despite the maneuverings of the Company, a halt or delisting is still possible should PWC depart or any material disagreements between the board, PWC and or management appear. As it stands, PWC is still NQ's auditor and work continues to be done.
While I will be the first to admit this is all speculation, the pieces are certainly coming together to make for a compelling team capable of guiding NQ through a take-private process or accepting the investment of a strategic or financial investor.
Disclosure: The author is long NQ. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.