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Ditech Networks (DITC): Lamassu Holdings Missives are Misleading and Should Be Ignored

Posted on July 17, 2009

Back in June, we highlighted Ditech Networks (Nasdaq: DITC) as an interesting investment opportunity, given the company’s negative enterprise value, despite what appears to be clear signs of improving business fundamentals and financial peformance.

Recently, however, Lamassu Holdings LLC (Lamassu), a large institutional shareholder in DITC, has commenced a proxy fight with DITC to win two board seats. Unfortunately in their pursuit of Board election, Lamassu has started disseminating misleading information to stockholders of DITC, even though they claim to represent the interests of DITC’s shareholders. It is ironic that a large shareholder of DITC, will purposively publicly malign DITC, and thereby in reality hurt shareholders of the company, even if Lamassu stands to lose money by these negative PR campaigns. This fact alone, as well as others detailed below, should cause current investors in DITC to question Lamassu’s missives and motives.

Other reasons for maintaining skepticism towards Lamassu include:

1.
Lamassu Has Demonstrated Complete Disregard for Shareholders by Offering to Buy DITC for $1.25 per share.
In the past, Lamassu has offered to buy DITC for $1.25 per share. Even a cursory glance at the company’s balance sheet, and current legacy business, would convince even the most neophyte financial analyst, that Lamassu’s offer is inadequate and laughable. The valuation would assign the company a negative enterprise value, despite over $20 million in annual legacy sales, over $38 million in cash (not including ARS which we fully expect the company to monetize at some point), and substantial intellectual property and other intangible assets. In effect by offering such a ridiculous buyout price, Lamassu is attempting to buy DITC for nothing. This is clearly not in the best interest of shareholders .

2.
Lamassu’s Description of Ditech’s mStage/toktok Product is Meaningless
Furthermore, in its recent press release Lamassu call DITC’s new mStage/toktok initiative, “an unproven technology that to date has produced no revenues and has no immediate prospects.” This of course is an unintelligent comment.

mStage/toktok is a very new product from DITC, and as any industry participant knows, it can take quite some time to sign deals and generate revenues from a new telecom product, particularly when your customers are major telecom providers. Quite simply, the sales cycle for these types of products is quite long.

So the fact that mStage/toktok has yet to generate revenues, is irrelevant to any investor in DITC. The key point is whether or not, mStage/toktok has long-term (i.e. 3 to 5 year) potential. We encourage readers to perform their own due diligence on mStage/toktok, since if they do we think they’ll agree that the mStage/toktok has enormous potential.

Furthermore, since we’re not sure how Lamassu defines “immediate prospects”, we’re unclear what this evaluation of mStage/toktok implies. As mentioned above, as long-term investors with a 3 to 5 year time horizon, we believe that mStage/toktok has significant prospects.

3.
Lamassu’s Description of Most DITC Investors is Completely False

Finally, Lamassu also states in a recent PR: “Investors in Ditech Networks (NASDAQ: DITC - News) are not venture capitalists and did not sign up for this type of speculative investing with such a large portion of the Company’s assets.”

We beg to differ. Any serious investor in a deep value micro cap stock understands the speculative nature of such an investment and by allocating capital to such an investment has purposively signed up for such a speculative endeavor. Investors who do not care to speculate in micro cap stocks are free to invest in larger companies with less speculative prospects. Furthermore, the investment appeal in many micro cap situations is precisely due to the venture capital type of analysis and returns that these equity investments can provide, notwithstanding the public trading of the shares. Almost by definition, investing in deep value micro cap, is the functional equivalent of venture capital investing.

Conclusion: Ignore Lamassu and Focus on DITC’s Future Financials Which We Believe Will Improve

In conclusion, based upon the reasons outlined above, we recommend that subscribers and other investors in DITC ignore Lamassu’s diatribes against DITC, and focus on the DITC’s financial performance going forward. Ultimately, the company’s future performance will dictate the share price. Past performance has no bearing on the future direction of the company’s business or stock.

As we mentioned in our first write-up, while DITC has surely had a few very difficult years, due to both macro-industry factors outside of DITC’s control, as well as a few past management errors, the company’s core legacy business has currently stabilized and will in fact begin to grow again in the coming quarters. A more positive mobile industry and overall economic outlook, will surely benefit DITC’s legacy business, and provide strong momentum for the company’s new product initiatives.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in DITC. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

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This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.