Another Demerit for Corporate Governance and A-B Share Classes (Formerly “Why Doesn’t the CSC PM Learn His Lesson?”)

Press Release
Cove Street Capital, LLC and Other Shareholders
Resoundingly Rebuke Westell Technologies, Inc. Board
of Directors and Strategic Direction

EL SEGUNDO, CA, September 22, 2016 – At the annual shareholders meeting of Westell Technologies, Inc. on September 13th, 2016, 72% of shareholders not-affiliated with the Penny Family Trust withheld support for both Robert C.Penny III and his nephew Robert Foskett.

“This is a clear repudiation of Business as usual at Westell,” states Jeffrey Bronchick, CFA, the lead Principal of Cove Street Capital, LLC, which on behalf of its advisery clients, is the largest non-insider shareholder of Westell, with 16% percent of the Class A shares. “We once again call upon the Penny family to take the obvious steps to preserve the value of the common shares, obvious being the immediate hiring of an investment banker to sell the company.”

Robert C. Penny III, who leads the Penny Trust that controls the voting B shares of Westell, and has been a member of the Board of Directors since 1998, continued to show his multi-decade disdain of shareholder interests by managing not to attend the annual meeting. “As if to add color to a caricature of poor governance, the company deemed it appropriate to release the results of the vote in a classic Friday afternoon press release,” added Bronchick.

Eugene Robin, CFA, a partner in Cove Street Capital, LLC, attended the annual meeting and gave the following speech to the Board members who deemed it relevant and part of their fiduciary responsibilities as a Board member of a public company to attend their annual meeting.

Ladies and gentlemen, my name is Eugene Robin and I’m a Principal at Cove Street Capital. We’re the largest shareholders of this company not named Penny. While Buzz and his family have been here from day one I doubt anyone else on this Board or in this room truly knows the full history of this company since Buzz joined the Board. Westell’s history of value destruction goes all the way back to December of 1999, when they spent approximately $200M to acquire Teltrend a move that was supposed to refresh Westell, which was at the time a floundering company that was dedicated to losing money in the loop access business. It may or may not be a coincidence that Buzz joined the Board officially only a year before, but whatever the case, the Board, with Buzz representing the family’s interests, voted to acquire the company in order to restructure the business mix into a higher growth area, namely HDSL modems. A new CEO, Marc Zionts, was also installed in order to provide new growth leadership. At the time of the Teltrend deal, shares were at $12.

This was the first instance of a “turnaround” or “new CEO story” at Westell with Marc Zionts lasting two years and getting bounced in 2001 after buying Teltrend and then promising a “new Westell” driven by new products – after two years that narrative no longer held up as the Westell continued to bleed operating cash and looked to be entering an industry downturn with incredibly high operating cost levels.

“Turnaround” story number two comes by way of Van Cullens, who came in to clean up the mess Zionts created; he immediately started laying off people and ran the company profitably for the next five years thanks primarily to growth in DSL modems across the country – as far as we can tell, that was the last “successful” CEO that Westell had, although that “success” didn’t translate into a stock price that moved very much from the time Cullens took over to the day he retired. By the time Cullens stepped away, Westell was once again facing a core market that was in secular decline (DSL) and was staring at a bleak future. That secular decline is reminiscent of the current state of Cellular Specialties.

After Van Cullens came Thomas Mader, who arrived in January 2007 to a company in a spiral downward competing against Chinese manufacturers in a shrinking market and losing money hand over fist doing so. Mader attempted to enact the third iteration of a “turnaround” but within a year realized what few in this room seem to understand: the business isn’t capable of being saved from the forces affecting it. With an absentee family controlling the company’s strategic direction, Mader left unexpectedly nearly a year after joining. We congratulate Mader as being smarter than the rest of us.

In between Mader and Rick Gilbert was a former Board member named Bernard Sergesketter, who stepped in to be a caretaker for the company while the company shed personnel and shrunk its footprint. The Board ushered in Rick Gilbert in 2009 to enact the fourth iteration of a “turnaround” at Westell. Gilbert came in, realized what a mess the company was, sold CNS, and then reinvested the proceeds into Kentrox and Cellular Specialties – both have been disasters that are materially lower than when Westell bought it. Since the day Gilbert sold CNS, this company has bled about $1.80/share in cash.

So why are we doing this? Why am I here? I’m here because the definition of insanity is doing the same thing over and over again and expecting a different result. This is nothing against Tom Gruenwald and his team, this is just us worrying for the well-being of shareholders who have seen their assets shrink with every iteration of a Westell “turnaround.” Why would the fifth iteration be any different? Haven’t 20 years of mediocrity been enough to prove that this company is nothing more than a subscale failure that has no business being neither public nor a standalone company? We are worried that there may not be a sixth “turnaround” to fall back upon if the Board continues to try to get from under this rock on their own. Again, this has nothing to do with management capability. Management’s plan is sound on its face but leaves out an important fact: the industry Westell sells into is merciless, consolidated on a customer level and structurally disadvantages subscale firms selling into it. There is no place for Westell at the table.

We’ve wanted to engage the Board because this just feels like Groundhog Day to us. Same strategy, a different management team and Board and almost surely the same end result. At this point we feel it’s necessary for us to stand up and say something and hope to intervene before all value is destroyed.

To paraphrase Edmund Burke, all that it takes for assets to be squandered and shareholder value wasted is for good men to do nothing. We call upon the board to immediately hire an investment banker and sell the company. No more consultants, new management teams, turnaround hype or other useless alternatives that end up burning ever more cash. Selling this set of assets is the only way to recoup some value for shareholders and resolve a multi-decade mess.

Important Information:
Cove Street Capital, LLC, a Delaware Limited Liability Company, is a California based, SEC registered investment adviser that commenced operations in 2011. For questions please contact Questions@covestreetcapital.com

Press Release
Cove Street Capital, LLC Announces Plan
to Vote Against the Board of Directors of Westell Technologies, Inc
After Repeated Rejection of Request for Discourse

EL SEGUNDO, CA, August 23, 2016 — As a follow up to an August 10, 13D filing with the SEC, and a letter to the Board of Directors of Westell Technologies, Inc (Nasdaq: WSTL) (“Westell” or the “Company”), Cove Street Capital, LLC (“Cove Street”) announces their intention to vote against the Board of Directors of Westell. Cove Street’s attempts to establish a constructive dialog with Westell have been rejected, most recently in the form of a letter from CEO Tom Gruenwald—the public face of the company who is unfortunately tasked with answering for the Company’s past mistakes—professing that Cove Street’s suggestions are being “considered” by the Board.

“We believe that the stock’s performance over the last 15 years and the current share price speak for themselves,” states Cove Street Principal and Portfolio Manager, Jeffrey Bronchick, CFA. “As such, it is not clear to us what is left for the Board to consider.”

Cove Street presently owns 16.3% of the common stock class A shares outstanding, making it the second largest shareholder after the Penny Family Trust. Cove Street’s research suggests the following:

• The last five years of operating results clearly indicate that the Company does not have enough scale to consistently operate profitably, produce positive free cash flow, or generate returns above its cost of capital.

• The lack of scale combined with end market cyclicality and customer concentration—the top 2 customers accounted for 34.2% of revenue in FY 2016—create considerable risk of further negative free cash flow and shareholder value destruction.

• Given the current share price, unless the Board acts quickly, the Company is at risk of being delisted from the NASDAQ.

• There are numerous buyers for the Company’s assets and waiting to sell after more cash has been burned will likely only diminish the Company’s bargaining position.

• The current Board has shown no ability to facilitate a turnaround of the Company’s fortunes, despite having brought in a number of CEOs and supported numerous failed growth initiatives.

Mr. Bronchick continues, “We fully understand that as A-class shareholders we can be outvoted by the Penny Family’s B-class shares. Despite that, shareholders still have the opportunity to voice their displeasure for the current state of affairs at the upcoming annual meeting. To borrow an apt quote from Carl Icahn, ‘A lot of people died fighting tyranny. The least I can do is vote against it.’ ”

Important Information:

Cove Street Capital, LLC, a Delaware Limited Liability Company, is a California based, SEC registered investment adviser that commenced operations in 2011.

Press Release
Cove Street Capital, LLC Calls On Westell Technologies, Inc
Board of Directors to Hire Investment Banker, Sell Company

EL SEGUNDO, CA, August 11, 2016 — In a letter to the Board of Directors of Westell Technologies, Inc (Nasdaq: WSTL) (“Westell” or the “Company”), and in an updated 13D filling with the SEC, Cove Street Capital, LLC (“Cove Street”) called upon the Board of Directors of Westell and in particular, its controlling shareholder, Robert C. Penny, III, to end nearly two decades of shareholder value destruction by hiring a reputable investment banker and selling the Company.

Westell August Performance

“It is not a giant mental stretch to conclude that owning the shares of Westell has been a dismal investment over almost any time period during the past 20 years,” states Cove Street Principal and Portfolio Manager, Jeffrey Bronchick, CFA. “What is prompting our rare and frankly undesired public stance is the obvious disinterest of the Board and in particular, Robert Penny, III—who leads the Trust that controls the majority voting shares in Westell—to show any ability or desire to improve shareholder value.”

Cove Street presently owns 16.3% of the common stock class A shares outstanding, making it the second largest shareholder after the Penny Family Trust. Cove Street’s research suggests Westell’s complete inability to create shareholder value is largely due to its small size and specifically that it sells to very large customers in a telecommunication industry that requires significant scale. It simply does not possess the scale to profitably develop new products or to run an operations infrastructure that can effectively sell into what is an increasingly global industry.

Cove Street Principal Eugene Robin, CFA adds that, “It is time for the Board and the Penny family to wake up and take an interest in the damage it has inflicted on shareholders … and frankly its own economic position. Westell has no business being a standalone public company and every day that goes by, the Company burns cash and eats shareholder value. We urge the Board and the Penny family to take immediate action.”

Read Cove Street Capital’s Letter to the Board of Westell below.

Important Information:

Cove Street Capital, LLC, a Delaware Limited Liability Company, is a California based, SEC registered investment adviser that commenced operations in 2011.

csc logo

August 11, 2016

Westell Technologies, Inc
750 North Common Drive
Aurora, Illinois 60504

To the Shareholders and Board of Directors of Westell:

Cove Street Capital, LLC is a Los Angeles based investment management firm with $1.1 billion in assets under management, an amount that sadly includes roughly 7.7 million shares of Westell Technologies, Inc (“Westell” or the “Company”) which represents 16.3% of the common stock class A shares outstanding.

Let’s get to it. The Board of Westell is, for all intents and purposes, held captive by a Family Trust led by one Robert “Buzz” C. Penny, III. Specifically, the trust owns 22% of the class A shares but more importantly owns the B-voting stock, providing it a 51% control interest in the Company.

The Company was founded in 1980 by Mr. Penny’s father, Clint Penny, and as far as we can tell, “Buzz” has never had anything to do with operating the Company; he has merely sat on the Board of Directors for almost 18 years as a controlling shareholder. During that period Buzz has presided over one of the worst shareholder records I have witnessed in my 32 years in the investment business. It is difficult to add anything to this table of woe:

Westell August Performance

We are writing to call for an end to the charade before any more new growth ideas or second chance opportunities burn more cash and further destroy value. Just about any unbiased observer would conclude that the Company should immediately hire a credible, third-party investment banker and put the Company up for sale in order to salvage what lemonade can be salvaged. Our extensive research suggests there are legitimate, willing buyers who can provide scale to Westell’s minute product line.

While the Company’s management team is an honorable group and has been forthright regarding the difficulties of the industry, it has been proven by the experience of the last four CEOs that telecommunications equipment supply is at best a low margin, low return, miserable industry when you have some scale. What has become patently clear is that it is an exercise in futility to try and operate profitably at the size and scale of Westell. The announced restructuring plan is another exercise in futility and there is no line of sight for the company to end a near Olympian record of burning cash for 19 out of the past twenty quarters. The Board of Directors of Westell, led by their controlling shareholder, have operated Westell as a near-hobby for almost two decades, burning cash through operations as well as poor acquisitions. Surely someone in the extended Penny family cares about his or her inheritance and wants to receive some kind of final cash dividend instead of a used DAS conditioner in the mail.

Another Sad Chart: Free Cash Flow (FCF) Down the Drain

CSC - FCF chart

As a point of reference, in 2012, Westell had $2.87 of cash per share, in addition to some remainder assets that could have been sold for cash. Instead, shareholders are looking at a current quote of 62 cents.

While we can go through several inches of paper that provides background on any number of these issues, I find it difficult to imagine there is a shareholder alive, including those with the Penny surname, who thinks that this is an acceptable state of affairs.

As the second largest shareholder in Westell, we have tried for several years to meet privately with Robert Penny, III, who controls the Trust which controls the majority of Westell’s shares—and have consistently received a complete Heisman from Mr. Penny, III. We were informed as recently as August 5th, 2016 (via voicemail from counsel no less) that once again he had no interest in meeting with Cove Street Capital principals in person or via telephone.

We are always a proponent of intelligent and private discourse with our partners in public company investing. Histrionics and debating strategic direction in a public forum is rarely a process that best delivers value in an acceptable manner. But every good idea has an inflection point where it stops being a good idea and we are at that juncture with Westell. Since Mr. Penny, III has definitively shut off options for intelligent and private discourse, we are going very public in an attempt to frankly shame what is at best disinterested corporate governance. Unfortunately, at this point we have zero confidence in their collective incentives and motivation to do the right thing for shareholders, given their disastrous record of destroying their own wealth. Like a California voter who is not a registered Democrat, our vote may not mean much, but we have the motivation and tools to be active … and loud.

We would be remiss if we did not add the following very timely issue. The Company has been notified by NASDAQ that it is in violation of its $1 rule and our reading of NASDAQ regulations suggests the Company has until year-end to be above $1 or it will be delisted. May I have a show of hands of who wants to own Westell, controlled by the Penny family and its track record, as basically a private company? (Come to think of it, maybe that is EXACTLY what the controlling members of the Trust are trying to achieve.)

In closing, we urge the Penny Trust and its advisers to do what is obvious and coincidentally in their best interest. Since the latter is apparently all that has ever mattered to them, the choice to sell the Company should be an easy one.


Jeff sig
Jeffrey Bronchick, CFA
Principal, Portfolio Manager

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