Proper press releases and investor relations communications for companies are invaluable. Even if I own stock in a company, whether for a trade or an investment, I'll call them out if I think they've dropped the ball.
I wasn't shy about calling out Net Element ( NETE) and Mullen Technologies. I did it here. Twitter certainly saw my frustrations. And I reached out to both companies. I should add, I've never heard back from either company, directly or indirectly.
Well, maybe the indirectly isn't true.
Wednesday, the company released a letter to shareholders. Now, I understand many likely had the same questions as I had, so perhaps it is purely coincidence, but the shareholder letter answered the precise question I asked.
The company framed their response around this:
"...Since announcing the contemplated merger, we have received a number of inquiries from shareholders requesting clarification regarding the expected number of shares that will be outstanding at closing if the pending merger with Mullen were to be approved..."
First, it's about time. Second, thank you. And third, it may be too late.
The company outlined that based on the close price of the stock on Aug. 18, the estimated share count would be 50 million. In fact, if the stock moved higher, it would remain the same 50 million. That price was $9.26. If the stock drops below that price, then the share count would rise above 50 million with a cap of 75 million.
This was, or rather is, helpful guidance for investors. No, it's not perfect, but it is extremely useful.
Before tearing through the Securities and Exchange Commission filings, I held the initial reaction that matched many other traders': Take the market cap of NETE and multiply by 15% to get the projected market cap of the post-merger company. Based on the Tuesday close, many, too many, believed the post-merger market cap would be $258 million.
Unfortunately, when you realize a 50 million share count equates to a $463 million market, you might second guess your thoughts of it being a bargain. Certainly at $20 (a $1 billion valuation) or $15 (a $750 million valuation), you may have had second thoughts, but if you thought that stock price equaled a $420 million to $550 million valuation, you might have questioned the sharp selloff.
Confusion equals selling. Bad PR equals selling.
The result is a broken stock, which equals?
You guessed it, selling.
That is why Wednesday's bounce likely was faded on Thursday. It's not about value anymore. It's about trapped buyers looking to exit at break even or a smaller loss.
After hours of reading and re-reading the SEC filings, I outlined my thesis about the market cap one even, that the ESOUSA note and the current debt and the commitment for the post-merger company to have $10 million in the bank meant the market cap was really $200 million higher than the simple NETE market cap divided by 15% figure. And between us, I still wasn't sure if I was correct.
Turns out, those figures have some tie-in to the stock price, so it isn't a static number, but rather a close approximation. Clearly, some came to the conclusion more quickly and sold. Others sold out of confusion. Others sold to lock profits.
Unfortunately, I believe the letter has come too late to help the stock in the short-term. As I said before, there are too many trapped longs and NETE management broke the stock. It will likely take until after the merger is closed to see any upside, assuming there is upside. To make matters worse, the lower the price drops, the more shares we'll see issued; therefore, it doesn't necessarily mean the stock is becoming a better value proportionally the lower it goes.
In short, if you are a company out there set to merge, learn from the mistakes of others. Net Element management royally screwed this one up. It may make for any attractive entry for a patient investor, but I now believe the upside is capped around $10.50 and the downside around $7 until the merger is completed. I remain long, but definitely irritated with Net Element management and myself.
