Hedge fund in Connecticut snapping up Aether stock

Amaranth owns about 17 percent of Baltimore-based wireless company

More than 7 million shares bought in past year

July 08, 2005|By Tricia Bishop | Tricia Bishop,SUN STAFF

While many investors lost interest in Aether Systems Inc. after the Baltimore business ditched wireless technology for mortgage-backed securities - taking its beleaguered shareholders along for the ride - that's exactly when a Connecticut hedge fund took notice.

Amaranth Advisors LLC has been steadily snapping up Aether shares ever since, amassing 7.3 million in the past year, with about a dozen transactions occurring since late April, according to Securities and Exchange Commission filings. The hedge fund owns about 17 percent of Aether, making it the firm's largest shareholder.

It's difficult to decipher the meaning or rationale behind Amaranth's stock purchases. Aether's remaining managers and directors did not return calls. A spokesman for Amaranth said the fund, like most hedge funds, does not comment on its investing strategies.

According to a recent regulatory filing, Amaranth has more than $8 billion in assets under management in hundreds of businesses, including Aeropostale, eBay Inc., Jos. A Bank Clothiers Inc. and Office Depot Inc. Its investors include banks, insurance companies, Wall Street firms, wealthy individuals, foundations and pension plans.

"We specialize in arbitrage trading strategies that identify, and efficiently capture, disparities between value and price in financial markets throughout the world," the company wrote in an online advertisement for a job opening this week.

That would suggest that Amaranth sees Aether as undervalued, a good way to sneak into the hot real estate sector through a back door at a bargain price: Aether stock closed at $3.27 per share yesterday on the Nasdaq.

Aether operates like a real estate investment trust, or REIT, though it isn't organized as one. Such trusts own portfolios of real estate or real estate securities. The trusts that make up the Wells Standard & Poor's REIT Index have an average price to book ratio - which compares its stock market value to its shareholders' equity - of about 2.2 while Aether's is 1.1.

Aether was founded in Owings Mills in 1996 to market revolutionary wireless data transmission technology.

The company embodied the dot-com craze, with its stock price soaring to more than $300 per share four years ago, making Chief Executive Officer David S. Oros worth more on paper than Oprah Winfrey. Area officials had hoped Aether's rapid rise would make Baltimore the Silicon Valley of wireless.

But interest soon waned, and Aether whittled away its client base and its divisions, selling them to other companies. Last year, it exited technology altogether, cut its staff to fewer than 10 people, moved its offices to Baltimore and converted from a software developer to an investor in mortgage-backed securities.

Now, the company's chief asset is its losses as a tech company. As of December, the company had recorded $1 billion in tax loss carry-forwards, which it can use to offset income taxes it would have to pay on profits.

Aether has said it has no immediate plans to pay shareholders dividends, instead opting to reinvest any money it brings in. Unlike true REITs, which are required to distribute 90 percent of their taxable income to shareholders as dividends, Aether can keep essentially all of its profits - including the money others would have to pay in taxes. That could be up to 35 percent if it were the top corporate tax bracket, said Tom Ochsenschlager, vice president of taxation at the American Institute of Certified Accountants.

"That means it could get very big in a very short period of time if they can keep plowing these earnings back," he said.

For the quarter ending March 31, Aether reported a loss of $658,000 but said it expected to be profitable by the end of the second quarter, which ended last month. Aether's mortgage-backed securities portfolio had a value of $434.4 million in the first quarter and brought in $808,000 in interest earnings.

The one catch in Aether's plan to generate tax-free profits would be if its ownership changed. That would limit the carry-forwards the company could use, under tax laws written about 20 years ago to stop trafficking in tax losses, said George White, a technical manager with the AICPA.

In May, Aether revealed plans to reorganize and restrict stock transactions by those who own 5 percent or more of the company, in an effort to avoid an ownership change and protect its loss carry-forwards.

Exceptions to the restriction will allow a pre-existing 5 percent or more stockholder - such as Amaranth and NexGen Technologies LLC, an Oros-founded company that owns 7.6 percent of Aether - to transfer stock if it does not create another 5 percent owner. The restrictions will be voted on during a shareholder meeting in Baltimore on Tuesday.

"We are proposing the reorganization in order to help protect the long-term value to our company of our substantial net operating loss and capital loss carry-forwards, which are an important part of our business strategy," the company wrote in a May filing with the SEC.

For those reasons, it's unlikely Amaranth would want to take over the majority of Aether, though it might want to hover around 49 percent ownership and allow business to continue as usual, Ochsenschlager said.

Still, "there has certainly been movement among hedge funds recently to be more aggressive about their investing and to attempt to assert a role in the management of some of the companies they invest in," said Howard A. Neuman, an New York investment attorney.

In an April filing with the SEC, Amaranth used boilerplate language that suggested the company would remain a passive investor and did not plan to influence Aether's management.

"That could change. They're not required to maintain that status," Neuman pointed out.

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