This column was originally published on RealMoney on Sept. 6 at 2:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Often when activist shareholders get what they want, share prices immediately reflect it, which is why I like following these stories.

The latest example comes from Computer Horizons' ( CHRZ) planned merger with Analysts International ( ANLY) -- a deal I wrote about last week.

The battle is heating up between the company and Crescendo, the activist fund, led by Eric Rosenfeld, that is opposing the merger. Encouraged by Crescendo, shareholders voted Friday to block the merger. Shares of Analysts International subsequently fell 50 cents, and shares of Computer Horizons rose 64 cents to close at $4.20, perhaps inspired by Crescendo's efforts and the hope that those efforts will further unlock value. The 52-week high for Computer Horizons is still 10% higher than the closing price, at $4.64.

During the week before that, Computer Horizons came out with a press release further detailing its strategy in conducting the merger, and one of its investors, the Al Frank Fund, led by value investor John Buckingham, came out in support of the merger.

On Friday, Crescendo issued a press release and filed a DFAN14 with the SEC commenting on the press release. Specifically, it raised these issues that the company did not discuss in its press release:
  • A high price is being offered for Analysts.
  • Analysts' business is deteriorating.
  • If Computer Horizons stock is undervalued (as management has claimed), why isn't the company buying back its own shares? Seems like a less risky way to create shareholder value than overpaying for Analysts.
  • The company has a history of missing guidance. Is the $15 million cost-cutting achievable?
  • The company didn't look at all available options.
  • Management and board own very little shares and bought very little in open-market transactions.

What's Next?

The next critical event comes on Sept. 22, when shareholders vote on whether to keep the company's board intact or to remove the board and replace it with a slate proposed by Crescendo.

If the Crescendo slate wins, expect the company (assuming Crescendo then takes control of the company) to hire an investment bank and either look to get bought at a much higher price or take on debt and repurchase shares. Also, Crescendo has noted that the company frequently missed guidance on revenue. I expect that there might be a one-time readjustment of revenue, and then I would look for the company to start surpassing guidance.

Meanwhile, as TSC reporter Emma Trincal, has pointed out, Rosenfeld is now involved in an activist battle surrounding IT services firm GEAC Computer ( GEAC).

This is a slightly harder story. As opposed to Computer Horizons, which consistently missed guidance and was pursuing a strategy that arguably ran blatantly against strategic guidance, GEAC shares have had a nice, steady climb over the past year, income has grown each year: to $74 million in 2004 from $37 million in 2002.

However, with a market cap of $860 million, net cash (with only $5 million debt) of $184 million, and cash flow from operations of $79 million in the past 12 months, a strong case can be made that with nice growth and a great balance sheet, this represents a significantly undervalued situation. The key is what to do with the cash.

The company is going to be tempted to make acquisitions, and as Emma pointed out, Rosenfeld opposed the company's recent acquisition of Extensity. I'd expect Rosenfeld to call for an increase in share buybacks. Flush from his success with Computer Horizons, where his shares just posted a significant gain from his purchase price 20% lower, my guess is that Rosenfeld is going to be itching for an increase in the battle over GEAC.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Computer Horizons and Analysts International to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.


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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 and Trade Like Warren Buffett. At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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