Identiv (INVE) has been a company we have written a lot about over the last six months. Normally, we only trade small cap companies and rarely invest in them, but Identiv is one we believe is a worthy investment because of its undervaluation and growth potential.

Well known activist investor David Callan first pointed out Identiv to us as a legitimate small cap investment and convinced us to do deeper due diligence on the company. We ended up agreeing with Dave, and took position in the stock.

In order to be fair with our coverage of Identiv, we want to present Callan’s current thoughts on Identiv, many of which we agree on.

While Identiv seems intent on improving investor relations as noted by company CEO Jason Hart, activist investor Dave Callan is nonetheless pushing for it to hire an investment banker to pursue a sale of the company.

On June 24 of this year, we reported that Callan had taken a position in the company and was supporting management and the officers. This was the opposite of his usual active and aggressive approach to dealing with undervalued investments and its management. He cited Identiv as great turnaround story in a developing technology space. 

Additionally, we noted in the article that,

With Dave Callan on board, we have to believe if management ever engages in activity that is not beneficial to the shareholders, he and his attorneys will be there to demand the exploration of strategic alternatives. 

So, what has changed his view leading to the belief that it should be sold?  Callan continues to believe that Identiv has top notch management in place.  His belief that Jason Hart is a top notch Chief Executive Officer (CEO) has not changed, and he applauds the impressive turnaround that Jason and his team have accomplished – we agree. 

Callan sees the company now as streamlined with an expanded customer base with unnecessary costs eliminated.  This is combined with a significantly strengthened balance sheet and positive EBITDA results documented in the most recent quarter that has the company well positioned for the future in a growing market space.

However, the company remains grossly undervalued in his opinion in which we also agree. Because the company’s need for confidentiality regarding a majority of its business (security), Callan believes it will not be able to reach fair market value. Callan also feels that the traditional methods to build shareholder value are ones the company does not have access to as a result of these restraints. As Jason Hart himself has said many times, "our hands are tied as such that we cannot tell the world who our business partners are and what Identiv has to do with them." 

We think Callan has a good point here, but we also note that the company has been interviewing Investment Relations firms (IR) and is hoping to have one in place shortly after the 1^st of the year.

However, Callan believes that the lack of transparency will hinder Identiv from achieving the valuation it deserves.  He told us:

I believe that the only way we will maximize shareholder value is through the exploration of strategic alternatives.  While under the leadership of Hart, shareholders have yet to see one material piece of official news related to any of our partnership wins.  We only know of big name partners like Disney, Cisco, Verizon, Nintendo, and NXP Semiconductors through discussions coming from Management.  Shareholders are placed in the precarious situation to play ‘detective’ to try to determine what this company is actually doing.  It should not be the responsibility of shareholders to conduct patent searches, or listen to each and every word of lightly monitored presentations or earnings calls for subtle hints of what has specifically transpired over the course of the calendar year with the company.

We think Callan makes a good point here, as we’ve remarked before in one of our previous articles, shareholder frustration has grown, especially in the recent case of Verizon (VZ).  Hart cleared up some of the confusion in the third quarter conference call by admitting that the Verizon product in its recent public video is in fact Identiv’s technology. 

He went on to say that the company is working closely to blend its product with Verizon’s into a unique offering that is now being taken globally.  However, conference calls and speaking engagements seem to be the only place to find much evidence of these agreements. The SEC filings do not disclose the significant financial impact that this deal may have to Identiv and additionally, there have been no press releases covering the big names. In large part, because the company has been relying on internal IR, it has not done a good job in getting the Identiv story out.

In our view, hiring a reputable IR firm will help bolster the stock price, as one of the most important tasks an IR firm does is to call funds it has specific contacts with, and tell Identiv’s story to these funds who would be perspective buyers.

In a similar fashion as Hart, CFO Brian Nelson recently spoke at a conference in New York City about its agreement with Disney (DIS) and its well-known Infinity toy collection, including shipments totaling approximately 150 million NFC tags. The terms and potential impact this deal may have for the company is unfortunately still unclear, although sources indicate to us that the company is likely to also provide NFC for Disney’s Star Wars Infinity toys – to be released next year when the new Star Wars film comes out.

Callan feels this is an ideal time to explore the potential sale of the company, and in many ways, we do agree with him. Management has done a good job getting the books in order, and in the hands of a bigger company with greater resources, we feel the company would see explosive growth.

As of right now, the growth of the business and endless market opportunities lie in the forefront of the Identiv sales team.  The hard work of positioning the company and streamlining it is over as previously mentioned. Now is the time to reap the rewards. In Callan's opinion, the sales team is too small and the market scale is limited as a direct result. Equipped with a long medical device sales background, he feels Identiv’s sales force should be several multiples of what it is today in order to properly realize its potential. He commented:

Identiv would benefit from multiple division leaders for all the applications that the company’s products span across, but does not currently have access to the large capital needed for this to become a reality now.

We hear about the endless applications that the new Identiv products can bring value to, and yet, the company operates on a limited scale in order to manage the growth orderly.  Jason has added an inside sales team and is increasing the overall sales group, but that takes time to develop along with his ‘Identiv Lab’ operation.  The time to strike in full force with a recognized name behind the effort is now.  It's frustrating to assume that some of the countless sales opportunities that are presenting themselves today to Identiv are not being serviced as a result of the current size constraints of the company and its potential lack of name recognition.  Competitors will eventually enter the space to compete when they see the scope and demand of this market place.  This is a critical time to reach the top tier to become the marquee name in the field.  Identiv would realize this success and become highly profitable with a partner that can take it and its products to the next level of global and epic scale.

In a letter dated November 8, 2014, sent to the board of directors of Identiv from his attorney, Callan cited:  

There is a successful history of mergers and acquisitions in this space today.  Take for instance SmartThings, a company that has an app which lets users control items like lights, temperature, and locks from their smart phones.  In August it was bought by Samsung (SSNLF) for a reported $200M."  Here we sit with some $90M in existing sales, $40+ million cash on the balance sheet, 23% growth last quarter, a war chest of patents (78 total) with numerous applications, and yet we have a market capitalization of only $85M? (Note:  at the time of this letter the stock was trading at approximately $9/share).  This is just one of the many offensive examples I could cite as to why we need to explore the sale of our business now.  If somebody is willing to pay $200M for SmartThings, what would they be willing to pay for Identiv?  It’s time to find out.  

Based on this example, we might even want to consider breaking the company up to spin off an IPO of an Internet of Things/NFC business that has 28 patents in that emerging space alone, and then ultimately sell off the remaining premise/Identity business (after 1-2 years building out the customer base and reestablishing the govt. business).  If Google was willing to pay $3.2 Billion in cash for Nest, I am certain we could in the immediate future fetch a number that would otherwise take some 3-5 years to reach on our own merit in the public markets.  Why risk years of uncertainty when the end result can be attained now? As board members of this company, part of your fiduciary duty beyond building shareholder value, is risk mitigation.  

In an evolving technology environment and a suspect economic climate, we will not always be ahead of the pack.  But when you are, you need to allow those that want what we have now, to have it while they are willing and able. Interest rates are still low.   Let the giants who are fighting to get in to our space make a play for us.  I undoubtedly would expect a bidding war for this company.  This board has done a tremendous job to downsize, deleverage, and make the company lean.  That effort has resulted in us becoming an optimal acquisition target and at the perfect time, when our technology is in the spotlight.  I believe that few jobs if any would be lost in the sale, and boldly believe upside potential would exist if merged with a larger entity with the resources to take this company to the next level. Identiv would make a great division for so many "Cisco" like companies.   Just imagine how quickly this technology could be deployed in the hands of strength?  The first call to order would be to hire 300 new employees to immediately double/triple the foot print in my opinion.

The following comments from SmartThings CEO Alex Hutchinson are ones that Callan feels the Identiv board of directors should learn from as he feels the two stories are very similar:  

With the thousands of partnerships that we're building on our platform, we had a chance a couple of months ago to meet David (Exec VP-Samsung) and his team. It just became clear to me that this was a totally shared vision. We had chance to continue to run on the independent path with a fully open model. But, we could leverage the global scale of Samsung and reach a much bigger number of customers more quickly. It's all about scale... Practically speaking, nothing changes, except for the better. We were the leading startup in the space, and folks should have no doubts that we are here for the long haul. Samsung is the largest consumer electronics platform on the planet. And we're so excited about what we can do together.

According to Callan’s point of view, public companies should not be in never-ending blackout periods. Callan feels that a few press releases here and there will not be enough to satisfy the demand for more transparency so investors can make educated decisions while markets fairly reflect the true value of Identiv. We tend to also agree with Callan on this point, but we also believe based on Hart’s recent guidance, this is about to change for the positive.

Callan thinks that large companies wanting to enter this space will provide a strong interest, as will larger private equity firms. In a sale scenario all of the potential buyers would sign NDAs and be privy to what’s behind the curtain.  He told us:

I have no doubt based on what Mr. Hart has said on conference calls and alluded to in presentations that those buyers would be blown away by what is going on and covet our business.  Larger companies, whether public or private, could leverage our technology with superior sales forces, existing business relationships and economies of scale to unleash what I believe is our substantial potential.  Based on the company’s guidance, it would be challenging to reach our full potential and hence we are far more valuable in the hands of a larger, stronger player.  This dynamic is of course what often drives acquisitions of companies.  I believe that given the premiums paid for companies in our space, we would see offers that substantially exceed the recent price targets placed upon us by reputable firms like Cowen and Northland Capital that average a combined $22.50.  Those price targets were also based on the company with its own limitations.

Callan has had a successful past as an activist, most recently with Solta Medical, Obagi Medical, and SRI Surgical. With Identiv now in his sights, we would expect nothing less as his logic for exploring the sale process makes sense to us. 

Although this was not his original intention when he built his position, he knows how to adapt to the current realities and hopes the board of directors will as well. The company continues to trade a far cry below where CEO and board member Jason Hart expressed the company should fairly trade; $400M, or approximately $31/share based on a fully diluted share count of 13M. We note than Hart did in fact say that he believes the company is worth $400M, so this was not a future or forward looking opinion.

We also note that this was said in an earnings call months ago when the company was not as strong as it is today.

Also, another view not being considered (the one we take) is that the company being so quiet is because it has been shopping the company, and may be getting close to selling it. In fact, we believe this has been Harts’ intention from the moment he took over Identiv a little over a year ago.

We recently guided our subscribers that Volcano Corp (VOLC) was very close to being acquired and we assigned a 70% probability for an acquisition to occur before the end of this year. On December 17^th, Volcano was acquired by Phillips for $18 a share.

We believe based on our due diligence that Identiv is a lot closer to being acquired than many might think.Our recent research indicates that Samsung might be interested and could be one of the currently unrevealed partners Hart referred to in the last earnings call. An added benefit that a large and profitable company such as Samsung would gain from purchasing Identiv is in the form of accumulated deficit. For Identiv, the company has an accumulated deficit of about $332 million as of September, 2014. 

A significant portion of this money would be able to offset future earnings or be written off. So, along with the technology, intellectual property rights, patents, and projected sales for next year of about $120 million, Identiv would have this additional leverage when negotiating with a potential suitor.

With current industry consolidation taking place, along with Identiv’s cleaned up balance sheet, the company seems groomed for a buyout.

We think that Identiv can certainly succeed on its own over time, but there are substantial risks for a small company like Identiv to take this route when an acquisition would remove these risks and bring a fair value now for the company’s shareholders.

We think it’s a good thing when companies have activist investors such as David Callan owning a significant stock position.  We agree with most of Callan’s views, but we also believe Harts’ intention all along has been to get the company to this point – groomed and ready for acquisition by a much larger company with the correct leverage to take Identiv to its full potential now rather than years down the road.

Therefore, we believe the company will be acquired in Q1 ’15, but it appears that Callan will not idly wait and see if this comes to fruition or not as he is taking activist action now.