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Hedge fund wants Analysts International to explore sale

by Michael D. Brown  |  Published December 14, 2012 at 12:55 PM
A Milwaukee hedge fund is pushing Analysts International Corp. to hire an investment bank and explore a sale in hopes of the information technology staffing and services company being acquired or taken private.

"We are pushing for the company to hire a notable investment bank and explore the possibility of a strategic transaction," said Jason Schacht, an analyst at Heartland Advisers Inc. that now owns 9.6% of AIC.

In a phone interview, Schacht and managing partner Will Nasgovitz said that, under the direction of AIC chief executive Brittany McKinney (pictured), the company hasn't been able to expand and continues to underperform. McKinney became AIC's chief executive in March 2011 after serving as interim CEO since 2009.

HAI first disclosed its desire for a sale in a Monday 13D filing with the Securities and Exchange Commission.

The 13D filing comes shortly after Minneapolis-based AIC posted relatively flat earnings and watched its stock price decline significantly over the past few years amid massive industry consolidation.

"The CEO has been on board [officially] for about a year and she has not done a good job gaining scale," said Schacht, who, along with Nasgovitz, work at HAI's Heartland Value Fund, which pursues micro- and small-cap investments. "You need scale to be competitive."

AIC provides a range of services, including staff augmentation services, project team construction services, and project-based solutions in the information technology space.

For the three months ended Sept. 30, AIC posted revenue of $26.5 million, an 8.2% decrease from the $28.8 million in revenue it posted for the same period in 2011. It suffered a net loss of $600,000 for the same three months, compared to net income of $1.8 million for the same 2011 time frame.

For the first nine months of 2012, revenue decreased $1.7 million, or 2.1%, to $80.3 million compared to the same stretch in 2011. In the first nine months of this year, gross profit was $18.2 million, or 22.7% of revenue, as compared to $19.7 million of gross profit, or 24% of revenue, for the first nine months of 2011.

"We believe the company would be better off as part of a larger entity," Nasgovitz wrote in a Monday letter to AIC management.

Calls to AIC were not returned.

Other staffing and consulting companies have had success in being acquired by larger entities, but those targets weren't as small as AIC.

For instance, on Sept. 28, 2009, Xerox Corp. bought Affiliated Computer Services Inc. for about $8.4 billion in cash, stock and assumed debt. Just under a year later, on Sept. 15, 2010, TechTeam Global Inc. sold subsidiary TechTeam Government Solutions Inc., a provider of IT and engineering staffing and consulting services to government agencies, to engineering and technical services company Jacobs Engineering Group Inc. for $43 million. However, those targets were larger to begin with.

Perhaps that's why HAI is also asking the company to explore the possibility of a take-private transaction, or other option that would remove its shares from its Nasdaq listing and help the company save cash.

"Additionally, being a public company has costs," Nasgovitz said in the letter. "At the company's size, these costs become prohibitive to achieving financial leverage and reaching sustainable profitability."

Nasgovitz claims that AIC would be able to save as much as $1 million per year. Given that the company has just 5 million shares outstanding, "this would provide a significant amount of cash per share for shareholders," Schacht added.

AIC has actually rebuffed numerous takeover attempts in the past that could have provided shareholders with a profitable exit. For example, on Feb. 1, 2008, Santa Barbara, Calif.-based Select Family of Staffing Cos., which owned about 5% of AIC at the time, made an offer to acquire the company for $43.5 million. The offer, which was the third such offer by Select Family since 2006, was for $1.75 per share and occurred prior to a February 2010 5-to-1 reverse stock split that helped bring AIC's stock price above the $1 minimum share price required by the Nasdaq.

Currently, AIC's shares, which trade on the Nasdaq under the symbol ANLY, are trading at around $3. As of Thursday, AIC had a market capitalization of about $15.5 million.

HAI, who has held a position in AIC since 2002, said it's tired of waiting for better performance and wants action now.

"As long-term investors, we have taken the 'wait and hope' approach, and it has not worked," Nasgovitz wrote in a letter to company management and shareholders. "With today's environment of low interest rates and robust private equity valuations, we believe the time to act is now."

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Tags: 13D filing | Analysts International Corp. | ANLY | Brittany McKinney | Heartland Advisers Inc. | Jason Schacht | Will Nasgovitz

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