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Activist Track: No Rest for eSpeed

Rejecting Tullett's bid will only ramp up the shareholder dissent.

A heated battle has been shaping up between electronic bond trading company eSpeed (ESPD) and activist investors Chapman Capital and WC Capital.

The basic idea is that eSpeed is sitting on almost $3.75 per share in cash, its shares trade for just $9.40 in recent trading, and its potential profitability is perhaps suppressed by conflicts with its controlling shareholder,

Cantor Fitzgerald

, as well as unprofitable investments in new ventures.

Howard Lutnick is CEO of eSpeed and Cantor Fitzgerald, and both activists are upset about what they see as a conflict of interest.

Most importantly, the activists have been calling for a sale of the company, a sale that almost happened when Tullet Prebon offered $12 per share in cash for the company.

But that offer was rejected without much consideration by Cantor. eSpeed also stated that "the board (has determined) not to engage in a process with a competitor to pursue a proposed transaction that is incapable of consummation."

Chapman Capital

is run by activist investor Bob Chapman, who is a character to say the least. He pulls no punches in his 13-D filings, even resorting to the occasional quotes from divorce filings about CEOs he is targeting. In his most recent 13-D filing on eSpeed, he mocks its hiring of a "chief ethics officer," given the conflicts he sees Lutnick having: "I propose that either Dennis Kozlowski or Bernie Ebbers be considered to fill the position once they have been discharged from their respective prison cells."

Chapman likes to find deep-value situations that are often hidden by management either paying itself considerable sums of money, or other types of management ineffectiveness, such as spending money on unprofitable ventures.

WC Capital's recent letter to the management of eSpeed outlines its own valuation thoughts:

As long-term shareholders of eSpeed we have performed our own analysis of the value of the company and have concluded that the shares are currently very undervalued. Specifically, we believe that the current valuation does not accurately reflect: 1) the company's strong cash positions of $187 million ($3.72 per share) as of Dec. 31, 2006; 2) the company's strong duopoly position in the electronic trading of debt securities and related instruments; 3) the potential cash flow from the "core" trading business, which has been and continues to be masked by the large continuing investments in unprofitable new business initiative, and 4) the intellectual property inherent in the company's proprietary trading technology.

WC is calling for either a sale of the company, or a return of capital to shareholders, combined with increased autonomy from controlling shareholder Cantor Fitzgerald.

eSpeed also has shown up in a portfolio put together by blogger "Big Ben" called

Greifeld's Next Acquisition"

, a collection of companies that he believes

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Nasdaq Stock Market


could potentially acquire.

I believe the company will ultimately go halfway with the activists, giving up some board seats and returning cash to shareholders through either a dividend or a buyback.

Given the large cash position, no debt, and possibility of large cash flows, it's no surprise that other quality investors have been accumulating shares in eSpeed.

Renaissance Technologies

, which is run by super investor Jim Simons and is up 30% per year since 1987, owned 437,000 shares as of a Dec. 31 filing, 148,229 shares more than in the prior quarter. Other Renaissance holdings include





(INTU) - Get Intuit Inc. Report


And deep value fund

Heartland Advisors

owns 712,000 shares. What I like about Heartland is that even in a bear market year like 2001, it had a 29% return. Last year, it was up 28%. Click the above links to see other holdings of those two funds.

For his part, Chapman has taken several other activist positions, including

Embarcadero Technologies


, where he called for the company to put itself up for sale and is also trying to replace four directors on the board, and

Cypress Semiconductor

(CY) - Get Cypress Semiconductor Corporation Report


For his full list of positions, plus his recent activist stances, check out the

Chapman Capital

portfolio page on

At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund


Trade Like Warren Buffett

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

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