The Sad Tale That Was Nimbus CD International
(now part of Technicolor)
I had a wonderful time but this wasn't it.
-- Groucho Marx
"You rarely see a merger announcement with the phrase, 'So long, suckers.'"
That's exactly what the Nimbus take-under announcement meant to thousands of shareholders. On the Internet the line was, "Now that dinner is about to be served, it's time to kick small shareholders out of the banquet."
Who was left? The head table, and please tender your shares to them on the way out.
There are various ways to assess the Nimbus story. This is my way.
Some years ago in Great Britain, investors got together and formed a company for the purpose of duplicating CDs. It was located in the backwater of Wales, but had enough success to warrant moving the business to the US where, among other things, it would be easier to find engineering talent to develop the company.
They settled at Guildford Farm in rural Greene County, Virginia. Low key, inexpensive, about as zippy as Wales, but a lot closer to the big time. Here they found and hired the talent they were looking for.
Engineering and development are not cheap. When faced with the costs, company Directors financed them by going public and selling stock. Let new investors, small investors, carry the burden of supplying development capital. They profit if the company is successful or lose if it's not.
That's how capitalism works, or is supposed to.
It was not an outstanding IPO (Initial Public Offering,) but it raised enough to carry the company to the phase beyond CDs, to carry them to DVD.
DVD is to an ordinary CD what a shopping mall is to a vendor pushcart. They do the same job but on vastly different scales.
It was before the IPO, during the early DVD development stage, that I came to know Nimbus. I visited Guildford Farm to ask about publishing my book on a CD and using the extra disk space for a Dave Matthews music video. Hey, Dave's a fellow townie here.
Nimbus engineers demonstrated why this wouldn't work and told me what the future would soon bring. At that point DVD didn't yet have a name. I was a stock buyer when the company later went public.
Like any new technology, it took time to mass product support for DVD. Toshiba, Phillips, Sony, and others built DVD machines to play them, but they were costly and only consumers on the cutting edge bought them.
Nimbus and the owners of its 23 million shares waited patiently for the new technology to catch on. It finally did. In 1997 Nimbus saw the big time just over the horizon. The company signed contracts with Microsoft, Disney, and other biggies. Sales of DVD began to take off with impressive percentage gains.
What happened to Nimbus stock? After two Microsoft contracts were signed Nimbus stock *fell* more than 25% from its 1997 high of 14.
At that point, beginning March 25, I began a detailed thread on the Internet about Nimbus's inability to enhance shareholder value. CEO Lyndon Faulkner and his team weren't doing obvious things that might increase Nimbus stock price. Directors and management were showing a then-inexplicable ability to fall on success rather than rise.
It was a public relations milestone to sign a contract with Disney, but Nimbus didn't say a word about it. When a shareholder wrote on the Internet that he had a Disney movie on a Nimbus disk, I called Nimbus for clarification.
"We're not allowed to discuss that," I was told, leaving the impression Disney wanted to keep it quiet, something Disney is well-known for.
I called a Disney executive who had no problem discussing the contract. He couldn't understand why Nimbus did. Neither could I. It came clear later.
There's a list of curiously missed PR opportunities that stared them in the face. Here's another.
Nimbus turned out hundreds of thousands of CDs, perhaps millions, but turned nearly all of them out anonymously. Nowhere on the disk or packaging did the name Nimbus appear. The Directors, CEO Faulkner, and his team were either astoundingly unaware of the value of name recognition to enhance shareholder value, or had a reason not to want that.
It was a small matter to raise hell about that in March, and I did. However Nimbus didn't budge, not until AFTER the take-under benefitting insiders. Once the public was out of the stock, shareholder value became important. A CD that arrived at my house Oct. 7 says in prominent letters what none said when it mattered to public shareholders: "Mastered by Nimbus."
When the fiscal year ended in the spring Nimbus held a 29 minute Internet conference call on May 23 at 10 am. The sound file was available for a week but has since been removed from the vcall.com site.
The report was filled with glowing news on the success the company was having, on the outlook for growth and value at last. Especially noted was a contract with Circuit City for promotion of something called DIVX, a variant of DVD. In the future, we were told.
We saw Circuit City TV ads for DIVX within a month. The future was now.
When that DIVX contract was first announced I wrote it up as a potential cash cow for Nimbus. The profit potential with DIVX seemed tremendous.
Nimbus didn't need me to say so. They knew it (though they later screwed it up.) That's when the deal for a take-under with Carlton Communications suddenly materialized. They needed distribution, they later said, and Carlton had it through owning Technicolor and related businesses.
So for distribution, Nimbus, now on the verge of making money for shareholders, decided it was time to take the company back, take it away from the 99% of us who owned the majority of the shares, take it back from the small investors who had taken the risk and earned the reward.
It should come as no surprise to any American that there are legal ways to do that, legal ways for under 1% of the owners with seats on the Board to take a company away from the other 99%. Law has its ways.
Alas for Nimbus someone let pussy out of the bag. There were whisperings that the company was in buy-out talks. The stock price shot up to over $12 a share, on its way up to where people thought the buy-out would be pegged. I pegged it at $14. So did many brokers.
Little did we know Nimbus was at that very hour committing itself to sell for $11.50.
How can you sell a company for $264 million when the value of your stock is more than $276 million?
Simple. Depress the stock price.
While the stock was being quoted on the NASDAQ at $12+ Nimbus CFO Steve Minkle issued a press release at 12:14 PM on June 10 announcing they were negotiating a buy-out at $11.50! The stock price dropped like an egg in a pan. No matter where it began they knew exactly where it would end. Immediately after the press release the stock dropped to $11.50.
Is it usual to announce you are in buy-out talks? Absolutely.
Is it usual to state the price being considered? Sometimes, when it's high.
Is it usual to gratuitously announce a lower buy-out price than what your stock is selling for?
Absolutely not. As close to never as anything gets.
Was that June 10 press release a smoking gun revealing a manipulative deflation of the stock price by the company being bought out?
Was it legal? Your guess is as good as mine.
What was it Dilbert said? "You rarely see a merger announcement with the phrase, 'So long, suckers.'"
Nimbus was incorporated in Delaware, and Delaware law allows dissatisfied shareholders to get a Chancery Court re-appraisal of the company.
Would it pay?
Berenson Minella, the financial advisory firm that told Nimbus directors to accept $11.50 a share, told them that in a letter full of disclaimers. Nearly every paragraph is a red flag to small shareholders.
Yet every director but an absentee voted to sell.
After I dissected this letter on the Internet, Nimbus filed after-the-fact changes to the letter with the SEC - changes in the wording, changes in the part the letter was said to have played in the Board's decision.
You can't change the written word but trying to makes you look caught in public with your pants down. That's how Nimbus looked.
Is there no law requiring Directors or a company president to act in the best interests of the company *and* the shareholders?
Yes there is, and many of us think a failure to get more than $11.50 is a violation of Director fiduciary responsibility.
Issuing that June 10 press release signed by the chief financial officer is a declaration you found a buyer and are not negotiating for a better offer, not even with them.
Later filings with the SEC proved that absolutely true. Nimbus Directors admitted that Berenson Minella brought in other suitors at higher prices and the Directors turned them away. Who were they? Nimbus refuses to say or let anyone else reveal them.
One wonders what the record would look like if we knew which companies they were, and could ask them if they got a fair hearing on their offer.
"A done deal by the Brits," was the first comment I heard when the SEC filings became available. Carleton is a British Corporation with ties to the original British Nimbus backers. The secrecy makes that the best guess.
There's a widespread opinion it's not possible to value Nimbus at $11.50 a share unless you ignore the future. Can you ignore the future when making an appraisal?
No. Company future potential is a requirement in an appraisal, just as in an appraisal for real estate or anything else.
Determining future value is a science. It's not an exact science, but it has accepted tools and accepted calculations and accepted margins for error.
When people in the business say Nimbus was worth $14 a share, and brokers all over say they expected $15 to $18 later that year, when analysts tell you average mergers in this price range are at 30% over the current stock price, shareholders had reason to think bringing suit would work in their favor.
No one could afford to bring one. It was obvious to someone from the start that this could be done with no big guns being hurt, only the public. On July 20 I sold my Nimbus stock in disgust.
Follow the money. The take-under included these tidbits:
A learning experience. We learned who NOT to invest with. Unless we're in on the IPO we won't invest in any company whose Directors include any name connected with this list of Nimbus's Board who sold the shareholders out:
1. McCown De Leeuw & Co plus The Gamma Fund. Held roughly 25% of the stock and 3 Board seats.
2. Behrman Capital and the Strategic Entrepreneur Fund. Held roughly 17% of the stock. Brothers Darryl & Grant Behrman sat on the Board.
3. Charles Ayres, a General Partner of MDC Management Company III (De Leeuw.) Not just a seat warmer, he was a major, active, Nimbus Director. His De Leeuw Board mates were David E. De Leeuw and George E. McCown.
4. Robert M. Davidson
5. Anthony V. Dub
6. Lyndon J. Faulkner
7. Glenn S. McKenzie
8. Steven Minkel
9. Robert J. Headrick
10. Howard G. Nash