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Management Beware--ChapCap's Back

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EL SEGUNDO, Calif. (–Robert L. Chapman Jr. is back in the business of filing Schedule 13D documents with the Securities and Exchange Commission.

His first target following the relaunch of his activist strategy is Carreker Corp., a Dallas-based consulting and software company that does business with financial institutions. His nine-page letter to management is clear and simple: Auction yourself off at not quite double your share price.

Last week [June 7], Carreker executives reported earnings of $0 per share for the first quarter of 2006 and reassured investors that there was reason to remain confident about the company’s prospects over the course of the year. The following day, Mr. Chapman unleashed his activist campaign via a letter addressed to Carreker directors and ultimately to other shareholders.

Chapman Capital LLC launched the Chap-Cap Partners II and Chap-Cap Activist Partners funds earlier this year. Chap-Cap Partners II is essentially a clone of the fund Mr. Chapman ran from 1996 through 2003.

In his first 13D filing since the previous fund’s closing, Mr. Chapman criticized Carreker directors, describing them as “decidedly derelict” in maximizing the corporation’s long-term value.

The activist hedge fund reported a 5.6% ownership stake in the company which was taken on relatively recently; Chap-Cap Funds were not shareholders as of May 19 and are then not able to participate in the company’s annual shareholder meeting scheduled for July 13 in Dallas.

During his pre-launch phase, Mr. Chapman relied heavily on war/battle analogies in describing his fund objectives. As 2006 proxy season winds down, he made clear that he was more interested in seeing other shareholders take action than in obtaining Carreker board seats.

Mr. Chapman wrote to that company’s directors: “However, I pray you do not rest peacefully at night dreaming of a world free of proxy fights; as should another shareholder determine to follow our lead, ‘shadow 13D’ our filing, and propose an alternative slate of directors, consider your eviction notice having been served.”

It’s not clear how much support Mr. Chapman has among other shareholders. He cited Prescott Group Capital Management as a 7.2% stakeholder and as an activist group fighting for a higher stock valuation. Prescott has yet to launch a proxy campaign of its own this year, but in 2005 publicly bemoaned Carreker’s lagging valuation in comparison to its competitors.

Chapman Capital is calling on Carreker to hire an investment bank to find a strategic buyer that would be willing to buy the company at $12 per share or more. On Nasdaq, Carreker stock is trading at roughly $6.50 a share.

In the final paragraphs of his 13D letter, Mr. Chapman also said he intended to hire private investigators to conduct a full-scale investigation of Carreker executives and the board. The purpose of the investigation would be to get an idea of officials’ “work ethic” by tracking when individuals arrive and depart from the office, country club, golf course and dude ranch.

“In essence, you should live and breathe under the cloud that your past failures have subjugated you into a state of perpetual audit,” Mr. Chapman wrote.

After today’s [June 12] market close, Mr. Chapman noted an announcement from Carreker saying that it is in the process of exploring various strategic alternatives designed to best enhance the value for its company, employees and shareholders.

Mr. Chapman says this is the fastest response he’s ever gotten from a 13D filing in all of his past 15 activist campaigns. He would not confirm whether or not he had actually hired private investigators to trail Carreker executives, but said that Chap-Cap had operated until now as if the company was not going to cooperate.

Carreker said that it hired Bear Stearns last November to evaluate strategic alternatives such as a merger or sale of the company.

“We are conducting this process in a deliberate fashion to ensure the realization of benefits to the Company’s customers and employees, and to best enhance shareholder value,” said Carreker Chief Executive J.D. (Denny) Carreker, in a statement.

Mr. Chapman said he remains skeptical, but said that Carreker’s action has led to Chapman Capital “calling off the dogs for an indefinite period of time.”

“It’s one thing to hire a sherpa to climb Mt. Everest and a completely different thing to plant your flag on the summit,” Mr. Chapman said.

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Contact Bob Keane with questions or comments at [email protected].


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