Take a look at Highland Capital Management's purchases of American Homepatient (OTC:AHOM). At the end of 2006, Highland (through its Crusader fund and Strand Advisors) had accumulated a position of almost 2.161M shares.
As shares broke out of their slump in late March, Highland began buying more. At first, it started with small purchases in late March and the first few days of April. Then, on April 10, it unleashed all of its buying fury, purchasing a whopping 5,286,982 shares! That amounts to roughly 30% of the outstanding shares, per the latest 10-Q, all bought in a single day.
It's not hard to see the appeal. Even after its recent rise, American Homepatient sports a market cap. of only $47.27M, compared to annual sales of $352.98M (ttm). The company does, however, have substantial debt. Therefore, its EV/S ratio is much closer to 1, although still reasonable. More importantly for me, AHOM appears to have turned the corner operationally. Last quarter it made money. On a GAAP basis, American Homepatient posted net income of $1,073,000, or $0.06/share, on revenues of $76,933,000.
The involvement of Highland Capital is a net positive and a huge vote of confidence, but it does come at a price. According to the most recent proxy statement, Highland's position constitutes a change in control and triggers a fat payout for the CEO:
Have any change of control rights been triggered in any of the executive officer’s employment agreements?
Yes. On April 12, 2007, Highland Capital Management, L.P., the company’s largest stockholder, reported its acquisition of additional shares in the company, which gave Highland more than 35% of the company’s shares. This constitutes a change of control under Mr. Furlong’s employment agreement, which gives him the right to self-terminate within one year and receive a lump sum change of control payment that is currently estimated to be $3,300,000 plus any tax gross-up that Mr. Furlong may be entitled to, if this payment constitutes an excess parachute payment under section 280G of the Internal Revenue Code.
I hate these golden parachutes, especially at companies that have chronically underperformed. In my opinion, board members breach their fiduciary duties to shareholders when they sign off on those kind of compensation commitments.
At this point, though, Furlong's unduly plush contract had already been established and there is nothing that can be done about it. Shareholders need to incorporate it into their investment analysis, but in my opinion it's a relatively small negative that is more than outweighed by the benefits of this level of institutional involvement. I bought shares for my own account at around Friday's levels.
DISCLOSURE: I am long AHOM.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.