NEW YORK--(BUSINESS WIRE)--Elliott Management Corporation (“Elliott”), which manages funds that collectively have made a substantial investment in the common stock and economic equivalents of Mitek Systems, Inc. (together with its subsidiaries, collectively the “Company” or “Mitek”), making Elliott one of Mitek’s largest investors, today wrote a letter to the Mitek Board of Directors.
The letter outlined Elliott’s concerns with the Mitek Board’s refusal to engage with the serious acquisition interest expressed by ASG Technologies Group, Inc. (“ASG”), one of Elliott’s portfolio companies; ASG’s $10 per share offer represents a substantial premium (51%) to Mitek’s unaffected closing price on October 9, 2018.
In the letter, Elliott questioned if the Board’s priorities are aligned with those of shareholders, citing recent examples of entrenchment through the adoption of a “poison pill,” as well as misleading statements surrounding the timeline of ASG’s approaches to Mitek. Elliott requested that the Mitek Board immediately engage in meaningful dialogue with ASG to focus its attention on maximizing value rather than entrenching itself.
The letter can be downloaded and read in full at ElliottLetters.com/Mitek.
The full text of the letter can be read below:
November 20, 2018
The Board of Directors
Mitek Systems, Inc.
600 B Street,
Suite 100
San Diego, CA 92101
Attn: Chairman Bruce Hansen
Dear Members of the Board:
We are writing to you on behalf of Elliott Associates, L.P. and Elliott International, L.P. (collectively, “Elliott” or “we”), which collectively have made a substantial investment in the common stock and economic equivalents of Mitek Systems, Inc. (together with its subsidiaries, collectively the “Company” or “Mitek”), making us one of Mitek’s largest investors.
We are writing today to express our deep concern regarding your refusal to engage with ASG Technologies Group, Inc. (“ASG”), our portfolio company which has expressed serious interest in doing a take-private transaction with Mitek. Contrary to Chairman Bruce Hansen’s assertions made in the Company’s November 5 press release, ASG’s $10 per share offer represents a substantial premium (51%) to Mitek’s unaffected closing price on October 9, 2018. Even putting aside the attractiveness of this premium, we are troubled by Mitek’s refusal to engage with ASG and allow it access to diligence materials with the aim of negotiating a final, binding bid for the Company. Instead, Mr. Hansen stated in the release that the Board has confidence in the Company’s “current strategy,” despite the many flaws and risks inherent in that strategy and despite the Company’s lack at that time of a CEO or CFO.
We believe the Company’s current, standalone path subjects shareholders to unnecessary risk and is unlikely to deliver risk-adjusted upside to shareholders in excess of $10 per share. Mitek’s stock price has not closed at or above $10 in the last year, and has only traded at or above $10 for a brief period between July and September 2017. Also, as noted in ASG’s October 31 letter, Mitek’s stock has meaningfully underperformed all relevant benchmarks over the past 1, 2, and 5-year periods. Profit margins have deteriorated significantly. Approximately two-thirds of Mitek’s revenue is tied to a secularly challenged market (check deposits), and we believe its efforts to diversify into the faster-growing market of identity verification are fraught with risk due to intense competition and Mitek’s lack of scale.
The Company’s recent announcement that it has hired a new CEO does not detract from the strangeness of the Board’s prior endorsement of a “strategy” with no management team in place to execute it. Instead, the timing of this announcement just raises new questions, given that the Board is supposed to set strategy in conjunction with management – e.g., was the new CEO’s willingness to rubber-stamp the Company’s existing, risky standalone strategy a condition of his hiring?
In contrast to this risky and questionable standalone path, we believe engagement with ASG offers a path to certain, premium value for shareholders today. Failure to pursue this opportunity is likely to expose Mitek shareholders to additional downside risk due to the fact that the market expects Mitek’s Board to engage with ASG and is pricing in the likelihood of a value-maximizing transaction. On October 10, the day of the publication of news reports regarding ASG’s acquisition interest, Mitek’s stock price increased by 17%. Similarly, on October 31, the day ASG released its proposal to acquire Mitek to the public, the stock price increased by 14%. Meanwhile, on November 2, the day after Mitek released its Q4 earnings and provided fiscal year 2019 guidance, the stock price only increased by 3%. We believe this pattern shows that the recent increase in Mitek’s stock price has been almost exclusively driven by M&A speculation, and in the absence of a transaction, we believe Mitek’s shares would undoubtedly fall back to a similar range where they were trading prior to these extraordinary events.
The fact that the Board is averting its eyes from these risks raises questions about whether the Board’s priorities are aligned with those of shareholders – questions that take on greater urgency upon further examination of the Board. For example, Board Chairman Bruce Hansen has been selling his own stock in Mitek aggressively at levels far below $10 per share, leading us to question the sincerity of his claims that ASG’s proposal substantially undervalues Mitek. From the time Mr. Hansen joined the Board through May 31, 2018, he sold no fewer than 66% of the 136,000 vested shares and options he received – 50,000 at $9.16 per share in November 2017, and another 40,000 at $8.66 and $8.74 per share in May 2018. This selling activity appears to be limited to his stake in Mitek – Mr. Hansen sits on the boards of two other publicly traded companies, yet he has not sold any of the shares he has received in these companies.
This pattern raises obvious questions: If Mr. Hansen was a seller of his own Mitek shares at $8.66 just last May, prior to the departures of the Company’s top two executives, then how can he be so dismissive of a $10 per share bid today when Mitek faces a deeply uncertain future in the wake of those sudden departures? Why, if he and his Board have confidence enough to “reaffirm” the Company’s plan, has he sold so much of his stock in Mitek since last November?
Other issues include the fact that three of the Company’s six independent directors serve on four or more corporate boards, making them over-boarded according to many institutions’ accepted corporate governance best practices; and that the Board apparently had no succession plan in place to deal with the departure of a CEO who had been at the Company for 17 years. These facts, in conjunction with the Board’s refusal to engage with ASG, lead us to believe that significant changes at the Board level may be required to ensure that the Board is representing the best interests of Mitek shareholders.
Instead of change, however, the Board has pursued a path of entrenchment, most notably through the recent adoption of a “poison pill,” which prompted an 8% decline in Mitek’s stock price over the three trading days following its adoption. Mitek’s attempts to disguise this poison pill as a tax-asset-protection plan are thoroughly unconvincing. As of June 30, 2018, the Company’s deferred tax assets were less than $15 million. We would expect that the application of Section 382 would not have a material (if any) impact on Mitek’s ability to utilize these deferred tax assets.
Mitek’s true rationale for adopting this poison pill – old-fashioned entrenchment – is demonstrated by the Company’s use of an amorphous and far-reaching definition of beneficial ownership that extends well beyond the requirements of the Internal Revenue Code. Therefore, we are sending a waiver request letter to the Board in the form of Exhibit A requesting relief from the poison pill recently enacted so that we may acquire “Beneficial Ownership” (as defined under the poison pill) of up to 14.9%.
Finally, we are deeply troubled by the fact that Mitek has made misleading statements to shareholders regarding ASG’s approaches to Mitek and Mitek’s engagement with ASG. For example, during the Company’s Q4 earnings call on November 1, Mr. Hansen made the erroneous statement that “ASG reached out to us shortly after the announcement of our executive changes…” (emphasis added). This statement implied an opportunistic motive to ASG’s approach, when in fact, as Mr. Hansen knows, ASG first reached out to former Mitek CEO Jim DeBello about a possible acquisition approximately one week before the resignation announcements.
Mitek followed this erroneous statement with another the next day, when it stated in its November 5 press release that it had only rejected ASG’s proposal after consultation with its financial advisors. This statement gave the misleading impression that serious analysis had been provided to the Board comparing ASG’s premium offer of $10 per share to the value-creation possible at Mitek on a standalone basis. In fact, Mitek is working primarily with Evercore’s activist defense team. Additionally, we question the timing of Evercore’s hiring, because Mitek did not appear to us to have involved any financial advisors in the evaluation and rejection of ASG’s private proposals. We suspect Evercore was only hired after ASG’s public proposal forced the Board to demonstrate at least an illusory level of diligence.
Even at our current ownership levels, Elliott is now a larger investor in Mitek than all of Mitek’s non-executive directors combined. In fact, only one of Mitek’s current external directors has ever invested his or her own capital in the Company. On behalf of all shareholders, we request that you immediately engage in meaningful dialogue with ASG. We are aware that Mitek representatives met on November 16 with representatives from ASG and Evergreen Coast Capital, our private-equity affiliate, but that no substantive engagement took place. Instead, it is our understanding that Mitek’s representatives simply repeated the assertions made in the November 5 release regarding the inadequacy of ASG’s proposal.
In fact, it is Mitek’s lack of a serious response to ASG’s proposal that is inadequate. We consider it the responsibility of the Board to enter into a non-disclosure agreement with ASG and permit ASG to conduct customary due diligence with the aim of making a final, binding bid. If it is truly the case that ASG’s $10-per-share, 51%-premium bid undervalues the Company, then allowing ASG to review Mitek’s financial records and plans so as to better understand the Company’s prospects for future growth can only benefit shareholders by potentially eliciting a higher offer.
We believe Mitek will face considerable downside risks in the market ahead. It is the responsibility of the Board to focus its attention on maximizing value rather than entrenching itself. We believe that ASG’s offer is worthy of immediate engagement, and we know from feedback we have received that our fellow shareholders share that view. We ask that you engage with ASG immediately for the benefit of all Mitek shareholders.
Best regards,
Jesse Cohn
Partner
Jason Genrich
Portfolio Manager
Exhibit A
November 20, 2018
The Board of Directors
Mitek Systems, Inc.
600 B Street, Suite
100
San Diego, CA 92101
RE: Section 382 Rights Agreement – Exemption
Dear Members of the Board:
Reference is made to the Section 382 Rights Agreement, dated as of October 23, 2018, by and between Mitek Systems, Inc. (the “Company”) and Computershare Trust Company, N.A., (the “Rights Agreement”), which generally imposes burdens on Persons that Beneficially Own 4.9% (the “Ownership Limit”) or more of the Company’s common stock, par value $0.001 per share (the “Common Shares”). Except as otherwise indicated, terms used herein without definition shall have the meanings provided in the Rights Agreement.
Elliott Associates, L.P. and Elliott International, L.P. (collectively, “Elliott”) request that the Board of Directors of the Company (the “Board”) grant an exemption under the Rights Agreement (the “Exemption”) from the Ownership Limit allowing for the acquisition or ownership of outstanding Common Shares by Elliott of up to 14.9% the outstanding Common Shares (the “Exemption”).
This letter agreement shall remain in full force and effect until the earlier of (i) the termination of this letter agreement and the Exemption upon the written consent of all parties hereto or (ii) the expiration, termination or repeal of the Rights Agreement.
Sincerely,
Jesse Cohn
Partner
Jason Genrich
Portfolio Manager
Please indicate your confirmation that the Exemption has been granted by the Board of Directors of the Company by executing this letter in the space provided below.
Acknowledged and agreed, as of _________ ___, 2018.
MITEK SYSTEMS, INC.
By: ________________________
Name:
Title:
About Elliott
Elliott Management Corporation manages two multi-strategy hedge funds which combined have approximately $35 billion of assets under management. Its flagship fund, Elliott Associates, L.P., was founded in 1977, making it one of the oldest hedge funds under continuous management. The Elliott funds’ investors include pension plans, sovereign wealth funds, endowments, foundations, funds-of-funds, high net worth individuals and families, and employees of the firm.
