PAR Technology Corporation (PAR)

* PAR’s strange use of proceeds

PAR is a favorite of a lot of GARP-y investors, and I have a lot of friends who I respect who are long the stock and I think have done really good field work on it. It has not been a great year for the stock; it’s down ~75%.

Some of that drawdown is clearly macro / market related (PAR is a payments / SaaS company, which is about as close to in the crosshairs of the SaaSpocalypse as you can get), but PAR really hasn’t done themselves any favors over the past year. That was capped off last week when PAR announced a convert deal with the stock hovering near all-time lows.

The convert deal itself was obviously ill-timed / not great for shareholders3, but the real kick in the teeth is the use of proceeds. PAR disclosed they’d “agreed to repurchase approximately 2.09 million shares of common stock from purchasers of Notes in privately negotiated transactions effected with or through one or more affiliates of the initial purchasers, at a purchase price per share equal to the last reported sale price of $15.85 per share.”

That’s an insane use of proceeds for three reasons. First, it’s a gift to the selling shareholders at the expense of everyone else. The stock fell from $15.85 to <$13 overnight on the convert announcement (before bouncing back to close at just under $15/share); buying back stock at $15.85 helps hand picked shareholders avoid a loss and swap into a better security. Why give those shareholders a special deal?

Second, it’s just kind of a strange deal to raise ~$250m of converts and say “hey, we’re using ~15% of this deal to buyback stock from selected shareholders who will then buy the converts.”

Finally, a big part of the bull argument was basically that PAR’s CEO was an outsider. He was on Invest Like the Best as “the Berkshire of Software,” and most bulls would talk about him being “thoughtful about capital allocation” (from this trata interview)4 and as one of the reasons to be bullish the stock. It’s hard to look at him in a very positive light now: his largest shareholder published a letter suggesting the company should go private, and he responded a week later with a convert deal (which would make a take private deal much more expensive) with a large piece of the proceeds going to buyout select shareholders. Woof.

Perhaps there’s some magic rainbow at the end of the PAR tunnel. I actually am travelling to New Orleans right now and just bought a smoothie and noticed the payment app was a PAR terminal, so there is a real business here. But everything about this convert deal does not look pretty from the outside looking in…