Lemonsoft’s Azure migration has not gone well at all. For some customers, systems have been non-functional for 2 weeks, for some even a month. On the ground, customers are getting fed up with the non-functionality and are already looking for other system providers.
LemonOnline’s development is far too slow. Navigating between two different user interfaces causes challenges and dissatisfaction for customers. Certainly, for the traditional Lemonsoft, organic growth will be negative in the coming years. Growth will only come from acquired businesses.
Luckily, I sold my shares a long time ago at a price of €14.10 per share. Too much inside information…
Am I reading the release correctly, meaning Lemonsoft intends to acquire own shares worth EUR 7.8 million pretty much immediately? Presumably, these will be purchased directly from the largest owners (this is not, of course, mentioned in the release). The company’s cash balance at the end of Q1 was approximately EUR 7 million, meaning the entire cash balance and a bit more would go into this exercise. If I interpret this correctly, I don’t recall anything similar happening in other companies recently, i.e., this type of transfer of funds from the company to selected owners. This raises some questions about the equal treatment of shareholders, but it’s certainly legally okay, as Krogerus is acting as an advisor.
Indeed, I wonder about the purpose of this maneuver. According to the announcement, it is financed with a bank loan. Could someone knowledgeable shed light on what this arrangement aims to achieve?
True, it is clearly stated in the announcement that it is financed with a bank loan. In such a case, there can’t really be any other actual reason behind it than that some owner or owners (options are few..) want cash and have not succeeded in selling shares as a block to anyone in this market, so the company takes a loan and buys back shares…? This is, of course, justified by developing the capital structure, but it’s hard to see what benefit this has for other owners than for those who sell shares to the company. The shares are, however, canceled.. I don’t follow Lemonsoft, but it seems that co-determination negotiations are also underway there, so things are probably not going too well, and then an estimated 7.8 million euros in interest-bearing debt is taken, which is used for something whose benefit to the company is practically zero (in my understanding).
If the price matches the fair value, then this makes no sense. Investors can themselves influence the amount of leverage they use.
There are quite few potential sellers for such a large number of shares, so they will likely get a good price for their shares. A rather unpleasant way to favor certain shareholders at the expense of others. Interesting to see what price will ultimately have to be paid for the shares.
EUR 2.5 million went into this maneuver, which, in my opinion, seems to be net negative for the company (and for other owners than those from whom the shares were acquired). The transaction took place essentially at market price.
There are some peculiar reactions here to the company’s own share acquisition. I don’t believe similar statements would have been seen if the company had announced “Lemonsoft is starting a share buyback program.” Here are my comments on the matter:
If you look at Lemonsoft’s ownership structure, the company has approximately 2200 shareholders, and one can get onto the top 100 list with about 1500 shares, meaning an investment of less than 10,000 euros. However, the shares must be bought back from the owners, so in Lemonsoft’s case, this inevitably means buying from a very limited group of larger owners, as they primarily own those shares. The company had previously launched a share buyback program, through which approximately 0.9% of the share capital was accumulated by buying from the stock exchange over about six months. Now, with a single transaction, approximately 2.2% was immediately acquired. The transaction was also carried out at a 1% discount relative to yesterday’s closing price, so in my opinion, it’s unnecessary for private investors to complain about unequal treatment here. One could have sold their small holding at approximately the prevailing market price for a long time if they wished.
Naturally, the main owners, Rite Ventures and Kari Joki-Hollanti, also did not sell shares in this arrangement. It can therefore be argued that the board currently views the share as moderately valued relative to its potential. In our view, the current valuation is not demanding given Lemonsoft’s medium-term earnings potential.
All in all, from my perspective, a very good move regarding capital allocation! Given Lemonsoft’s business cash flow profile, there should theoretically be even more debt on the balance sheet than currently, so in that sense, this is a well-justified move.
Share buybacks can also be seen as an investment. Instead of buying a completely new company, now with similar capital, moderately valued Lemonsoft was bought. In this case, the buyer certainly knows better what is happening in their own company than in a completely new acquisition.
Of course not, as that would only distribute money outwards. In share buybacks, the stake of owners who remain with the company increases when the shares are cancelled. Therefore, if the acquisitions are made at a reasonable price, share buybacks have the potential to transfer value from the pockets of the share sellers to the pockets of the owners who remain invested. This, of course, now requires that Lemonsoft’s earnings level improves in the coming years, and through that, the investment case we have outlined for the company materializes.
Let me explain in simple terms what is annoying about this.
The company takes out an interest-bearing bank loan to buy back the shares of certain shareholders from the stock exchange, where the share lacks proper liquidity. If someone else wants to divest a larger holding, they might have to wait a long time and certainly offer a discount greater than 1%. This is like a dividend distribution exclusively for the largest shareholders, but everyone pays interest.
It’s worth Googling “optimal capital structure” related to financing theory. Lemonsoft’s business generates good cash flow, so investments should not be financed solely with equity; it is much more expensive than loan interest. There could still be significantly more debt on the balance sheet, as I already wrote. And in this case, I see share repurchases as an investment from the board’s perspective. It was decided to invest 2.5 million euros in their own company vs. if a new acquisition had been made, for example.
And there was an opportunity for large shareholders to sell much more, as buybacks were promised to be made for 7.8 million euros, but only 2.5 million euros materialized. Most did not want to sell their holdings. So I don’t understand the complaint from that perspective either. Overall, this was very good capital allocation, and I would hope to see more similar moves from our stock exchange’s illiquid small/mid-caps, whose balance sheets allow for similar moves!
There’s also a debate on X about this topic. It’s also essential to note that almost 98% of Lemonsoft’s share capital is held by the top 30 owners. So, to acquire the little over 2% slice that was just bought, all other shareholders would have had to be bought out. In that case, according to the rules, it couldn’t even be listed on the stock exchange anymore, as the number of owners would be too small
Well, at least the price is low enough. It can also be argued that the company doesn’t belong on the stock exchange if the ownership structure is so concentrated that such operations have to be carried out. In that case, the share price formation is not efficient and transparent.
I agree with Ate, I don’t see this as negative in any way after the implementation. That 2.5M is significantly smaller than the announced maximum amount, and since the main owners did not participate in this, the arrangement is acceptable to me. I have long had in mind as one scenario that this will be delisted from the stock exchange. As noted there, with a really concentrated ownership, you don’t have to agree on the matter with too many parties to get sufficient support for it. Certainly some premium will have to be paid; such a Tallink maneuver hopefully won’t succeed here in Finland
Yllättävän hyvää hintaan osakkeita saatiin ostettua suhteessa osakekurssiin, joten sen puolesta oli hyvä ratkaisu. Osakkeiden määräkin jäi huomattavasti alhaisemmaksi kui oli mahdollista.
This only holds true when there are no friction factors such as taxes, transaction costs, or information asymmetry. For example, taxes significantly affect the optimal capital structure because loan interest is tax-deductible and thus forms a so-called tax shield (assuming the company makes or will make a profit from which the paid interest can be deducted before tax payment). This tax deductibility therefore encourages borrowing and using leverage vs. solely equity.
