Vu1 Corporation (fka VUOC)

[Robear]

Much ado about nothing

And the associated SEC filing:
http://www.sec.gov/Archives/edgar/data/906448/000114420411052188/v234548_pre14c.htm

It is funny how investors often react to stock splits… When some investors hear that a company is doing a stock split they pile on and buy up shares expecting the price to run up after the split (sometimes enabling a self fulfilling prophesy). When some investors hear that a company is doing a reverse split they flee from the company expecting the price to drop after the split (again enabling a self fulfilling prophesy). Regardless of what happens, short term price fluctuations due to a split are simply short term over reactions to a non event.

As many long term investors will point out “a stock split does not inherently change the value of company”. The market cap of a company remains unchanged right after the split. What really affects the market cap and relative price of a company after a split is supply and demand. If investors suddenly flush their shares into the market then the price will fall. If investors suddenly rush to buy the newly priced shares then the price will rise. If the split works as intended then the price will remain unchanged and hopefully rise over time as the company attempts to create value for shareholders.

Last night I took a close look at the upcoming stock split and associated changes that are also occurring.
Here are some of my notes:

1) The board has approval for “up to 20 for 1 reverse split”. It appears that their goal is to increase the share price to approximately $8 per share. They’ve mentioned they could split at “10 for 1” if the price is right but whatever they do will happen within 180 days.
2) “Everyone including the founders, private investors and retail investors will be split equally. That includes all common shares, warrants and options.”
3) The board has elected not to split 10,000,000 shares of previously authorized (but never issued) preferred shares. They retain the right to allocate those in one or more series as needed.
4) The board approved to increase the number of shares authorized for the employee incentive plan by 2x. These shares will also be subject to the reverse split.
5) The board approved a new number of authorized shares; previously there were 200,000,000 authorized shares and many of those were already issued via the form of common stock or warrants. The new number of authorized shares, (which won’t be split adjusted), is 90,000,000. This is decrease of authorized shares (as pointed out in their sec document) yet on a “split-adjusted basis” this is a 9x increase in the number of authorized shares relative to all other allocations.
6) The reason these actions have been approved is because Vu1’s majority shareholders believe that it is in the best interest of all shareholders (This is something newbie investors need to understand, the majority shareholders do not want to lose money hence they are taking actions that are meant to be in everyone’s best interest).

It appears that the board’s goals here are:

1) To increase the share price so that Vu1’s shares will satisfy the NASDAQ’s “minimum bid price and public float market value requirements”. They clearly intend to attempt a NASDAQ listing because it could “generate greater interest among professional investors and institutions and enhance prospective analyst coverage and brokerage recommendations”.
2) To protect the company possible takeover: “The large number of authorized but unissued shares of Common Stock may be construed as having an anti-takeover effect by permitting the issuance of shares to purchasers who might oppose a hostile takeover bid or oppose any efforts to amend or repeal certain provisions of the Company’s Articles of Incorporation or By-laws. Such a use of these additional authorized shares could render more difficult, or discourage, an attempt to acquire control of the Company through a transaction opposed by the Company’s Board of Directors. At this time, the Board does not have any plans to issue new shares of Common Stock resulting from the large number of authorized but unissued shares because of the reverse stock split.”

At first I couldn’t understand the motivation for the second goal because insiders currently own the majority of issued shares (making takeover nearly impossible) and with the employee stock option plan that percentage may only improve… Then I took a second look at this document and realized that “Smith and company” own a significant amount of this company hence the board may be protecting itself from the possibility of an internal takeover. Hmmm, taking that in to consideration this now makes more sense.

Personally I believe that the company’s actions are truly intended to protect and increase shareholder value, and I believe that the result will occur as intended, yet I do see the potential for problems if the board continues to take actions based upon the votes of a few shareholders without giving everyone else a chance to voice their opinions via proxy votes. I realize that a proxy vote utilizes valuable company resources (both time and cash) yet in the future I would appreciate a chance to voice my opinion.

Take care,

Robear