Accusing InterCept’s leadership of unsound business judgment, plus conflicts of interest and a good-old-boy style going against shareholder interests, the management company advising those with a 7.1 percent interest in InterCept, Inc. has demanded the company’s intended sale be completed and that its chairman and chief executive John W. Collins resign.
“Do not confuse our $22 million stake as a vote of confidence in [InterCept]’s senior management or its board of directors,” said the letter from Daniel S. Loeb for Third Point Management Company, which comes almost a full month before InterCept’s annual meeting. “On the contrary, it is our view that your record in management, acquisitions, and corporate governance is among the worst that we have witnessed in our investment career.”
Loeb said nothing made Third Point more convinced that Collins had to go than InterCept’s involvement with online payment processor iBill. InterCept bought iBill for $155 million and ultimately sold the company to a Penthouse International subsidiary earlier this year for $51 million, a $104 million loss Loeb said equaled one third of InterCept’s current market capital.
“What is incomprehensible,” Loeb wrote in his letter to Collins, “is why Intercept would choose to go into the euphemistically named ‘merchant processing business,’ when in fact a substantial majority of the revenues of this business were derived from processing charges for adult pornography sites on the Internet. It was not until our investigators provided me with an article written in Forbes in May 2003 that I understood the utter depravity and filth facilitated by this division.”
Third Point also wants the InterCept board of directors purged of James Verbrugge, Arthur Weiss, and Mark Hawn, saying Hawn padded his resume while suggesting Verbrugge was a less than competent director and that Weiss had too much of a history of business and investment failure.
Third Point through Loeb accused Collins and the incumbent board of directors of putting management interest ahead of shareholder interest – and of showing an “apparently harrowing pattern” of bad judgment, self-dealing, and business failure. Based on that, Loeb wrote, “we... must insist that the company take immediate steps to follow through on the process initiated last fall to sell the company.
“It is our fear that, should the company fail to resume the sale process, the underlying core business will continue to deteriorate,” Loeb continued. “Furthermore, management’s pattern of gross incompetence and dereliction of duty could expose the company to a potential tsunami of shareholder litigation.”
Loeb wrote that InterCept’s own proxy statement shows the prevalence of the good-old-boy style of ethics, from Collins’ son-in-law and daughter receiving six-figure compensation for apparently little actual product selling work, to InterCept leasing a private jet from a partnership consisting of Collins and board member Glen Sturm, the latter a partner in a law firm receiving millions in legal fees from InterCept in the past few years.
“This cozy relationship gave us pause,” Loeb’s letter said, “and caused us to wonder how Mr. Sturm and the Nelson firm could represent the interests of shareholders given the gravy train of legal fees earned by the firm, and the fact that Sturm and Collins could potentially be tooling around in a luxurious business jet, possibly sipping Cristal champagne cocktails at shareholder expense.”
Third Point is also accusing InterCept of practically “giving away the store” when it made a September 2003 deal with a Credit Suisse First Boston venture capital affiliate, Sprout Group, in which Sprout invested $10 million in InterCept – “less than 3 percent of [InterCept]’s equity value” – in return for Sprout getting veto rights on InterCept’s sale and “amendments to the company bylaws.”
Loeb wrote that he tried and failed to reach Collins to discuss that deal but “was ultimately able to reach Carol Collins, who described herself as ‘acting chief financial officer,’” and whom Loeb says told him the CSFB/Sprout deal came by way of an InterCept director she would not identify but whom Loeb said he learned “through our informants” was Sturm, “who had a pre-existing relationship with Sprout partner Robert Finzi, a contention that Ms. Collins could not deny.”
Finzi, charged Loeb, also sits on the board of NetEffect, an Atlanta-based telecommunications company in which Sprout invested in in 2001.
Loeb and Third Point also accuse Collins of moving to take InterCept private just six weeks after the share deal with Sprout – while planning to put Finzi on the InterCept board in October, with Finzi declining to become a full board member but attending board meetings as an observer. But in December, InterCept announced the plan to take the company private was shelved. Loeb in his letter accused Collins of thinking that if “his inside deal” failed, he’d “be protected from third party bids given the poison pill features of the Sprout [investment].”
Third Point isn’t the only investor which has given InterCept a headache. Last month, Jana Partners, LLC, which had recently become an InterCept investor, sought to pick candidates to stand for election to the InterCept board, which provoked a move in federal court resulting in two InterCept board seats open for election rather than the four Jana claimed.
Jana, however, said earlier this month that they would continue pushing for what they called “shareholder democracy” within InterCept, a position Third Point supports. Among other things, Jana proposed InterCept board members be removed only for cause and by a two-thirds shareholder vote. Jana also wanted shareholders with 10 percent or more allowed to force InterCept to call special meetings, rather than the 25 percent or more stake current InterCept bylaws require.
“We believe these proposals are necessary to insure that the majority of shareholders can elect directors of their choosing, rather than have the board hand-pick its own members,” said Jana managing member Barry S. Rosenstein at the time those proposals were announced. “Our goal is to put InterCept on the path to achieving maximum value for its shareholders, and these proposals will allow InterCept’s shareholders to replace the current board majority with directors who will work to accomplish that goal.”
Loeb also sniped at InterCept’s written code of business conduct and ethics, including a statement that company directors are expected to report possible conflicts of interest and to take appropriate action. “We demand to know what ‘appropriate action’ has been taken when rampant conflicts of interest are revealed,” Loeb wrote. “Perhaps the confessing party gets a ride on the luxury jet aircraft owned in partnership by company counsel and director Glen Sturm and CEO Collins.”
