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Dear Investors, Friends and Subscribers,

I am happy to report the portfolio recovered strongly in July and August, as most of my investment theses continued to play out nicely and most holdings reported strong results. Even a commodity-related Australian holding that was delisted after a sharp selloff on December 31, 2015 reported very healthy cash generation. The portfolio’s rebound confirms that it pays off to have patience and focus on intrinsic value rather than pursue short-term outcomes.

As I had stated in my H1 2016 letter (download here), the portfolio’s weak performance during the period was mostly driven by one investment: Perion Network (NASDAQ:PERI). To quote: “The financially most painful investment decision in my life to date has been an investment in Perion Network. This is an investment in what was once Israel’s largest IT start-up, after it had fallen on hard times and looked cheap in the aftermath. Unfortunately, there are serious issues with current management: a lack of credibility, a track record of horrendous capital allocation, and an overhead structure that no longer fits the size of the business. Many of these issues only revealed themselves over time and only became obvious earlier this year. It took me too long to spot them and to act accordingly.”

As it turns out, I am not alone in my assessment. Significant shareholder and serial entrepreneur Ronen Shilo (the founder of PERI’s largest legacy business) just called an extraordinary shareholders meeting with an open letter to the board, stating:

  • This deterioration results from lack of proper management and leadership. Perion’s executive management lacks vision and strategy. The Shareholder has requested several times that the Board replace the management, primarily the CEO, Mr. Joseph Mandelbaum. However, despite promising otherwise, the Board has not implemented these changes.
  • Faulty “staggered” Board structure under Articles is a primary reason for the Board’s complacency in not effecting management changes. Under the “staggered” Board structure, Perion’s directors are entrenched for three-year terms and do not face annual elections. Consequently, certain directors feel too comfortable with the status quo to lead these changes.
  • “Staggered” Board structure prevents shareholders from replacing complacent directors annually with new nominees who will better protect shareholders’ interests. Instead, certain directors, together with management, continue to direct Perion without proper reflection of shareholders’ interests.

I couldn’t agree more.

I believe the company is vastly undervalued based on how profitable it could be. However, to realize the company’s potential, one has to replace the CEO – and this apparently requires the replacement of certain Board members as well. The upcoming meeting is the opportunity for shareholders to speak up, re-gain control, and initiate a much-needed change in management.

If you know fellow shareholders of PERI, please spread the word. I hope to see many of them in Israel on September 26. Let me know if you have any questions.

Regards,
Robert

PERI – Form 6K – extraordinary shareholders’ meeting