Shareholders Launch Attack Against Synacor

NEW YORK (The Deal) -- Two shareholders are demanding that Synacor (SYNC) put itself up for sale, as changes in search engine technology affect its bottom line.

Michael Torok of technology focused private equity firm JEC Capital Partners and Bart Kool of Ratio Capital Partners said in an open letter Thursday that the Internet content provider should pursue strategic alternatives. Together, the two investors hold 9.8% of Synacor's common stock.

"We are confident that Synacor will have serious interest from multiple parties at prices far in excess of the current share price," the duo wrote.

Shares of Buffalo, N.Y.-based Synacor are up 6% year to date and closed up more than 6% Thursday following the shareholders' letter.

They described the board's "failure of leadership," pointing to a drop in Synacor's share price, revenue and cash balance. Share price performance has dropped over 50% since its stock market debut in 2012 and has "lagged every comparable peer, metric and index," they wrote. According to Torok and Kool, Synacor's revenue has steadily decreased from $122 million in 2012 to 2014 guidance of $100 million, as has its cash balance, which has dropped from $43 million in 2012 to $33 million at the end of the latest quarter.

In its most recent first quarter report on May 13, Synacor said revenue declined 15% from the same period a year ago.

Synacor has a market capitalization of about $73.2 million.

Corporate communications have no clear strategy, the two added, arguing that the share price highlights "irresponsible cost expenditures and missed opportunities for growth."

Chief Executive Officer Ronald Frankel announced in March that he would step down from his position and Synacor has been on the lookout for a new leader since then. Instead of searching for a new chief, Synacor needs to engage an investment banker to pursue a strategic review, the dissident investors said.

Synacor officials did not return calls Thursday.


Richard Tullo, director of research at Albert Fried & Co. LLC, thinks Synacor has been a target for an activist investor and strategic acquirer for a year.

Synacor's top line was particularly hard hit by Microsoft's (MSFT) Windows 8.0 operating system, he said. Synacor, which has been monetizing revenue via Google search, has been negatively affected by Windows' switch of its search engine to Bing.

The management has failed not only to see see this "coming down the line" but also to adjust proactively, Tullo noted.

"My suggestion to them is to have an auction for the company," he said, adding that now is a good time for the company to explore strategic options. "Unlocking the value [of Synacor] is really critical, and the board needs to do everything with a sense of urgency."

According to Tullo, there are a half dozen players in the television and cable back-end computing space that could be potential suitors for Synacor, including digital media company TiVo (TIVO) and media software company SeaChange International Inc.

He suspects the company could receive an offer of $4 per share to $6 per share. Synacor closed Thursday at $6.32 per share.

"If you're a Synacor shareholder, I would rather get 100 shares of TiVo stock at 12 dollars a share and give up 300 shares of Synacor stock," Tullo said.

Gene Ramirez, managing director of investment bank Morgan Joseph TriArtisan, while not commenting specifically on Synacor, said activist investors choose to target a company in a number of scenarios, from poor stock performance relative to their sector, to signs of weakness in their corporate takeover defenses.

--written by Jaewon Kang

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