As Hedge Fund Presses Takeover Bid, Mitek CFO Rescinds Resignation

Elliott Management, a New York-based activist hedge fund, has had San Diego-based Mitek Systems in its crosshairs for months.

In October, Elliott subsidiary ASG Technologies Group publicly “reaffirmed” an offer to buy Mitek (NASDAQ: MITK) at $10 per share—an unsolicited proposal that it said Mitek had previously rebuffed, claiming it undervalued the company. At the time, ASG argued that taking Mitek private would be better for the San Diego company’s shareholders than having it continue to operate as a standalone public company and trying to replace the two top Mitek executives who unexpectedly resigned in August.

The prospective acquirer may now need to tweak that pitch: Mitek executive Jeff Davison, its chief financial officer, this week rescinded his resignation.

The news comes roughly three weeks after Mitek said it had appointed a new CEO, Max Carnecchia. With Davison staying aboard, the company once again has a full C-suite.

Mitek, which makes software that banks and others use for remote document capture and digital identification verification, said in August that Davison and Jim DeBello, Mitek’s CEO of 15 years, were leaving the company. In the announcement, Mitek said Davison would depart on Nov. 30 to join a company near his home in Bozeman, MT. (No reason was given for DeBello’s departure, scheduled for year’s end.)

Mitek filed a document with securities regulators Monday revealing Davison would stay. The company declined to comment on the CFO’s change of heart.

As of Nov. 14, Elliott owned 0.78 percent of Mitek’s outstanding shares. Elliott said its acquisition of shares was intended to demonstrate the seriousness of its bid—and the hedge fund has said it’s one of the company’s largest shareholders. However, at least 10 other institutional shareholders own more than 1 percent of Mitek’s shares, according to data from Morningstar. 

ASG’s offer to acquire Mitek for about $380 million, based on Mitek’s stock price Oct. 9 (the day before news reports revealed its interest in acquiring the company), represented a 51 percent premium. Mitek noted the proposal offered no premium over its 52-week high, while ASG, in turn, pointed out at the time that Mitek stock had closed at or above $10 per share only one day in the past calendar year.

ASG, a Florida-based software company, said it had been conducting due diligence on Mitek for five months. Elliott acquired ASG last year.

In a press release explaining its reasons for rejecting the ASG offer, Mitek cited the results of its latest fiscal year, which ended Sept. 30, as evidence of its growth trajectory. Mitek reported company record revenue of $63.6 million in its fiscal 2018, 40 percent more than the year prior.

However, according to the most recent documents filed with securities regulators that provide information about its customers, the sources of Mitek’s revenue are concentrated: In the quarter that ended June 30, 49 percent of its revenue came from three customers. (Comparatively, in the same quarter a year prior, 43 percent of its revenue came from two customers.)

Mitek’s turndown hasn’t deterred Elliott. The hedge fund, which is known both for its deep pockets and ability to weather lengthy fights among shareholders and in the courts, in a public letter Nov. 20 reiterated its belief that shareholders were unlikely to see Mitek stock top $10 apiece.

“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,” Elliott said.

In the letter, Elliott requested exemption from a so-called “poison pill” measure Mitek recently adopted that effectively blocks the firm from acquiring the additional Mitek stock it desires.

In response, Mitek sent a letter to shareholders saying again that Elliott was undervaluing the company and that Elliott’s public attacks are intended to “destabilize” Mitek.

As for the the measure Elliott characterized as a poison pill? Mitek said it was put in place to protect tax assets were its ownership to change. But Elliott called the move part of a strategy of “old-fashioned entrenchment.”

Sarah de Crescenzo is the editor of Xconomy San Diego. You can reach her at sdecrescenzo@xconomy.com. Follow @sarahdc

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