Apis Capital Management really likes Veritone Inc., to the point of offering to buy it at an 82% premium.
The problem is that the once high-flying artificial intelligence company doesn’t appear inclined to bite.
And Wall Street doubts the deal will come together, as shares were about 80% below Apis’ offer price as of press time.
“We do feel that the offering is very compelling given the trajectory of the share price over the last year,” Apis Managing Director Edgar Radjabli told the Business Journal. “It represents the best outcome for shareholders.”
Costa Mesa-based Veritone (Nasdaq: VERI), which is trying to use artificial intelligence to monitor advertising, was valued much higher a year ago, when it reached an intraday high of $74.92 and a $1.1 billion market cap. Since then, shares have fallen to below $6.
West Palm Beach, Fla.-based Apis, which has a 5% stake in Veritone, had its private equity arm quietly submit an $8 a share bid on Dec. 4. When Veritone didn’t respond, Apis upped the offer to $10.26 a share, or $198 million in cash.
Apis also alerted investors with a press release stating that Veritone’s management has been unable to provide “a compelling vision for a turnaround.” The offer caused the shares to shoot up 19% to $6.71.
Veritone responded with a sharply worded press release, saying it asked Apis for more information on how it would finance the acquisition and on its experience in executing acquisitions.
“Apis’ response indicated that they do not have committed financing, and do not have any experience or track record in transactions of this nature,” Veritone said.
Veritone said it will study the $10.26 offer and advised shareholders to take no actions at this time.
The stock traded for $5.66 and a $109 million market cap as of press time.
Apis said its financial adviser is Shift4 Capital, a New York- and Florida-based investment bank, and Duane Morris LLP is acting as legal counsel.
Steep Sell Hurdles
An Apis acquisition would require some hurdles.
Veritone was co-founded in 2014 by brothers Chad and Ryan Steelberg, who are the chief executive and president, respectively.
About 20.5% of its shares are held by Newport Coast Investments LLC, where the managing member is Chad, according to the most recent proxy, filed in June. Another 14% is owned by Newport Beach-based Acacia Research Corp. (Nasdaq: ACTG), which has been divesting its stake since June. Acacia has offered to sell their last batch of 1.5 million shares to Apis, according to Radjabli.
D.A. Davidson & Co. analyst Thomas Diffely in a recent note to investors expressed doubt the deal will get done.
“Apis has held preliminary discussions with major stockholders and believes these stockholders would be supportive of the acquisition,” he wrote. “We believe, however, shareholder reaction would be mixed, as although the offer represents a nice premium over the current stock price, many of these investors want to maintain exposure in the emerging AI market and VERI is one of the few investable pure plays in this space.”
D.A. Davidson has a “speculative buy” rating on Veritone with a $12 price target based on future earnings potential.
Apis Methods
Apis decided to go public with the offer after Veritone’s board and management failed to respond in a timely manner, according to Radjabli, a former dentist who moved into the finance industry six years ago.
“Generally we prefer to work directly with the management team. We prefer to have a confidential process. That’s usually the best way we feel to handle transactions,” he said. “We’ve always done it that way. In this case it seemed the appropriate strategy was to make it public.”
Apis was established in 2015 as a traditional hedge fund focused on volatile trading. Earlier this year, it announced it would offer investors a strategy that uses AI-driven algorithms to focus on trading volatility in the S&P 500 Options and VIX Futures markets.
Its private equity arm, Apis Ventures, was launched this year with a focus on the hot artificial intelligence and machine learning segments. It’s made one acquisition. Last month it bought the blockchain intelligence and analytics division from The White Company, a 2017 startup that uses cryptocurrency to buy luxury items, on undisclosed terms.
Apis views Veritone as a strategic fit, particularly in improving the billing process and mitigating diagnostic errors in the medical industry.
“That’s something that can be significantly improved with machine learning,” Radjabli said. “We believe this will save billions of dollars in Medicare billing and for private payers.”
The PE unit has investment commitments of $500 million and plans to raise an additional $450 million to execute its strategy, according to Radjabli. It focuses on small- to medium-size companies in the $100 million to $500 million range with unique intellectual property or products.
Doubling Revenue
Veritone has primarily targeted the media industry as it vies to crack into the booming AI segment with a platform called aiWARE that allows companies to track advertisements and media mentions in real time.
Last month, Veritone reported third-quarter revenue that doubled year-over-year to $7.5 million, primarily from its media-buying business.
While sales in its artificial intelligence unit with aiWARE rose 150% to $1.1 million, it narrowly failed to meet a forecast of 95 customers in its AI unit; it had only 93. It further predicted that number will fall to 89 by year-end, a troubling sign that the product isn’t in hot demand.
The company attributed the decline to politicians not renewing contracts following the November elections.
It forecasted fourth-quarter revenue of $9.3 million to $9.7 million, which would be its highest to date.
The Steelbergs have two big exits on their resumes. AdForce Inc., a web advertising company sold to CMGI Inc. in the late 1990s for $500 million; and an advertising radio business, dMarc Broadcasting Inc. in Newport Beach, was sold to Google Inc. in 2006 for $502 million after meeting certain benchmarks.
