Will eSpeed Hit The Auction Block? (ESPD)

By Justin Kuepper | April 25, 2007 AAA

eSpeed Inc. (Nasdaq: ESPD) is a growing business that develops and deploys electronic-marketplace trading-technology, which gives traders access to the financial markets -- a hot market as global trading volume continues to rise. Shares in the company jumped dramatically this week after a $12 per share buyout offer was announced by Tullet Prebon.

The move was quickly tamed, however, when majority stakeholder Cantor Fitzgerald immediately rejected the offer saying the company was not interested in selling on the proposed terms.

Luckily for minority shareholders, WC Capital Management LLC jumped in, stating its support for the bid and demanding that the company hire an investment banker to evaluate future bids. This isn't the first time eSpeed has heard from the 6.4% stakeholder...

The History
Speculation of a buyout first hit the company in late March after WC Capital disclosed its 6.4% stake in the company and made several recommendations to the company's board of directors.

The first recommendation was for the company to consider putting itself up for sale. In its Schedule 13D filing, the hedge fund's analysis pegged the company's value at between $12 and $16 per share based on reasonable multiples of revenues and cash flows, along with the significant cash position of the company. Clearly, shareholders would have a lot to gain if the company were able to find a strategic or financial buyer in this price range!

Secondly, WC Capital expressed its concern over the company's dual class voting structure. This type of corporate structure has been frowned upon ever since the Enron collapse, since it often restricts shareholder power by minimizing votes. Therefore, the hedge fund recommended that the company convert all "super voting" Class B shares into Class A shares in order to give shareholders a greater say in corporate matters. (To learn more, read The Two Sides of Dual-Class Shares.)

Third, WC Capital took note of the company's $187 million worth of cash and cash equivalents and recommended that the company take action to return some of this money to shareholders via a special dividend or an aggressive open market share repurchase. The company has repurchased some shares in the past, but not aggressively enough to deliver any meaningful value to shareholders. More aggressive measures to return this cash would greatly enhance shareholder value.

Finally, CEO Cantor Fitzgerald operates both eSpeed and BGC in a complex three-way relationship that could be holding back valuations and causing confusion. Given BGC's impending IPO, WC Capital recommended that the two public entities be separated with different accountants and independent board members. The hedge fund noted that this would reduce the likelihood that one party is treated inequitably and that appropriate allocation of resources and expenses occurs.

eSpeed On the Auction Block?
The possibility of an eSpeed buyout or higher offer by Tullett remains, despite Cantor Fitzgerald's rejection. Tullett Chief Executie Terry Smith said, "Our first approach to eSpeed two years ago was rejected, but we continue to regard the strategic fit with Tullett Prebon as compelling." This suggests that Tullett's pursuit of the company is more than mere passing fancy.

Meanwhile, WC Capital's manager Aaron Braun said, "We view the Tullet Prebon bid as extremely attractive and deserves to be considered by the independent directors of eSpeed. Should Cantor Fitzgerald L.P. decide to match this, or any potential future offer, we would welcome that development.

"The Tullet Prebon bid of $12 is at the low end of our valuation range of $12 to $16 per Class A share we highlighted in our letter to Mr. Lutnick, chairman of eSpeed, on March 28, 2007, and thus is acceptable to us. Should other parties, including Cantor, make competitive offers, we would evaluate those at the appropriate time."

We know that Tullett is interested in buying the company, and that several minority shareholders such as WC Capital are interested in selling -- all the ingredients are there for an eSpeed buyout!

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