If Rackable Got a Bid, Could It Get Shareholder Approval? (RACK)

Shares of Rackable Systems (RACK) are trading up nearly 8% today as at least two different online options tracking services have reported that increased call option activity may be an indicator of an acquisition offer coming or of further shareholder-friendly devleopments.  Rackable fell more than 80% from its highs in the recent year and reached a new $11.25 low last month.

This is the epitome of a high-flyer that experienced a flameout, and the company isn’t even consistently profitable at the current time.  So the stock is up to $13.78, and that is close to a 25% gain off the lows.  There is a serious problem that ‘buyout speculators’ need to consider: a buyout offer doesn’t mean the deal would be accepted by the vast number of shareholders who are long and wrong.  There are so many shareholders who are long and wrong that would be crushed if a buyout came anywhere close to current prices.  That might put in a perceived floor to the stock, but it is just very hard to tell how high a bid would have to come before the company could get enough "YES" votes from all of the existing shareholders.  Maybe it’s as low as $15.00, maybe $20.00, maybe much higher…..

There were so many buyers each time this one took a whacking and it experienced enough gap drops from earnings warnings that bottom fishing in Rackable shares became bottom sniffing.  Maybe the sniffers this last round have come out well enough so far that they got to be true bottom fishers.  But thinking that a buyout could be approved at anywhere near current prices is a risk that is easy for most investors to not consider.

Rackable is a good company for a buyer that can smooth out the quarterly numbers without the demands and it could be a good holding for a larger company.  It just boils down to how much it would really take to buy it to keep shareholders from revolting more than just from the drop already seen.  The company’s market cap has sunk to $393 million at current levels.  It had more than $170 million in cash and equivalents and almost $75 million in total liabilities.  It’s cheap at current levels and we all know there is a reason it’s cheap. 

Jon C. Ogg
June 5, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he owns.