Let embattled Tessco chief plot his own path

May 09, 2010|By Jay Hancock

Tessco Technologies, a Hunt Valley-based distributor of equipment for wireless phone and computer networks, seems as ripe for a takeover as a company can be. But founder, CEO and Chairman Robert B. Barnhill Jr. isn't ready to let go.

So all the potential buyers who say they want to maximize Tessco's worth and all the minority shareholders agitating for an auction to make the stock go up aren't going to make much difference.

Is that so terrible?

In a weak economy, the embattled Barnhill is preserving 700 Maryland jobs that surely would be in jeopardy if the company were bought. He's preventing anticompetitive consolidation in the red-hot business of wholesaling components for cellular and broadband networks. He's keeping Maryland from losing another corporate headquarters.

And who knows? Maybe he'll end up making dissident shareholders happy, too.

Barnhill has gotten calls from Indianapolis-based Brightpoint Inc. and other competitors wanting to talk about buying Tessco, says Daniel J. Donoghue, managing partner with a Chicago money manager called Discovery Group. Discovery is Tessco's biggest independent shareholder, with a 14 percent stake.

Barnhill blows them off, so they complain to him, says Donoghue.

"The fact that people who wanted to buy the company were calling us because they couldn't get a response from management — we felt like that was something that needed to be brought to the board," says Donoghue, who met with Tessco's directors to complain a couple of weeks ago.

Buying Tessco might make sense for several electronics companies: Brightpoint, Ariz.-based Avnet, Arrow Electronics in New York and California-based Synnex. Two recently told Discovery they're interested in Tessco, Donoghue says, although he won't identify which ones. The companies declined to comment or didn't respond to my queries.

Whoever they are, as they approach Tessco, they face sharpened barbed wire across a minefield in front of big concrete walls. Not returning phone calls is only the start of it.

Barnhill is Tessco's chief executive and its chairman of the board, which gives him power over day-to-day operations as well as Tessco's strategic direction. That's too much influence for one guy in a company with public shareholders, according to the prevailing corporate-governance wisdom.

Moreover, the fact that Tessco's directors serve staggered terms means that it would take years for shareholders to vote them out. To fend off a 2007 Brightpoint attack that included the purchase of 9 percent of Tessco's stock, Tessco adopted a "poison pill" that would let existing shareholders buy cheap new shares if Brightpoint's stake got much higher. Brightpoint gave up.

The business case for a Tessco buyout is straightforward. In the brutal electronics industry, where prices are driven constantly lower, the biggest profits are to be found in economies of scale — selling as much stuff with as few employees as possible.

"It's all about keeping costs down," says Donoghue. Tessco, he says, isn't "big enough to get full, industry-sized margins. They're in a really high-growth area of wireless products, and they're the leader in it. A buyer can take a lot of costs out of the business."

Translation: Layoffs. Consolidation. People in Indianapolis or Phoenix doing Marylanders' jobs plus whatever jobs they had before.

But it's hard to argue with Barnhill's recent results. The company's stock is up fourfold to about $25 since February 2009, although it hasn't surpassed a $30 high in 2007. Sales reached a record $522 million in the fiscal year ended in March. Profits for the year hit a record $1.78 per share.

As more and more commerce and communication move to smart phones, iPads and other wireless media, Barnhill argues, Tessco will be able to capture much of the growth.

The company "is already a force in cellular and two way communications," he says via e-mail. "We're leveraging our expertise to become a force in new, emerging industries that use wireless communications."

Donoghue does a good psychoanalysis of the Tessco boss.

"It's not surprising that it's difficult for him to deal independently and dispassionately with potential suitors for the company," Donoghue said. "He's wearing too many hats. He's thinking about his own money. He's thinking about his job. He's thinking about his employees, his customers, his vendors."

Well, he's allowed to. So are the directors. Corporation law requires boards to think of shareholders first but gives them leeway to consider other parties' interests.

And Barnhill is a huge shareholder. He owns 25 percent of the stock, which makes him different from CEOs who dig anti-takeover trenches after parachuting in. He founded the place, which keeps winning "Best Places to Work" awards from Baltimore Magazine and "Best Small Companies" awards from Forbes magazine.

Tessco's board recently budged. Late last month, it junked the poison pill, set up a directors' strategy committee and made it easier for shareholders to call a special meeting. In diplomacy, they call this creative stonewalling. It probably won't open any doors.

Barnhill refuses to say whether he snubbed buyout queries, citing a company policy against talking about takeover rumors. But I wouldn't expect him to be returning phone calls from Indianapolis any time soon. I wouldn't blame him, either.

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