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Leadership Feud: Hedge Fund vs Managed Cloud Provider

teragoTeraGo, a cloud services and national IP network provider in Canada, is under pressure from Columbia Pacific Advisors, a private equity and hedge fund firm… and a major shareholder in the company. In a letter sent today to TeraGo’s board, Columbia Pacific called for changes at the national IT solutions provider — with a call to install new board members who are known for successful cloud leadership at Pier 1, Digital Fortress, Expedia and Conga.

The letter alleged that TeraGo’s incumbent board:

  • lacks relevant expertise and experience to compete in rapidly evolving and highly competitive industry; and
  • has a history of strategic confusion and value destruction.

Columbia Pacific Advisors already owns about 16 percent of TeraGo’s outstanding common shares. Next up, the private equity firm intends to nominate four highly qualified candidates for the board. They include:

  • Gary Sherlock, former CEO of Peer 1 Dedicated Hosting
  • Matthew Gerber, CEO of Digital Fortress
  • Stu HaaS, former senior VP of investor relations at Expedia
  • Matthew Shiltz, CEO of Conga

In some ways, the letter sounds like a publicity stunt — but a serious one at that. In a prepared response, TeraGo said:

“TeraGo received a letter today from Columbia Pacific, a US hedge fund, mere minutes before being released to the press. The Board of TeraGo takes the views of all shareholders seriously and will listen, as it does with all shareholders, to Columbia Pacific. The Board of TeraGo has a strong board selection process led by its Corporate Governance Committee. The proposed director candidates of Columbia Pacific will be put through this process. In the interim, no formal nomination, requisition or shareholder proposal has been filed by Columbia Pacific.”

TeraGo’s Performance

Why is Columbia Pacific Advisors pressuring TeraGo for changes? TeraGo’s stock is down more than 60 percent since the company went public, Columbia Pacific notes (though the hedge fund purchased most of its shares near all-time-low prices). And shares are down about 30 percent in 2015, the firm said.

Columbia Pacific sees TeraGo locked in a high-risk, high-reward strategy involving cloud services. That sector is “a rapidly evolving, highly competitive space with some of the most well capitalized companies in the world. While we believe this market offers significant opportunities for TeraGo shareholders, the potential for missteps is high, we are aware of many companies that are struggling to execute similar business plans, and, quite frankly, the track record of TeraGo’s Board of Directors (the “Board”) leaves us with grave concerns.”

Among the concerns: The cloud company’s board has little to no experience in the data center and cloud industry; developed an ill-conceived fiber optic plan; and a surprise data center acquisition was an “obsolete strategy.”

Cloud Services: Move Forward or Exit?

The Columbia-TeraGo feud is the latest inflection point in the high-stakes cloud services market. A range of large and small cloud and data center providers have either (A) doubled down on the cloud market or (B) exited to cut their losses in recent weeks.

In the past 24 hours, for instance, AT&T has punted its managed hosted applications business to IBM, while TierPoint acquired a managed cloud provider to expand its midwestern U.S. footprint.

Back at TeraGo, the ball is now in Columbia Pacific Advisors’ court. Will the hedge fund and private equity firm force the issue with TeraGo — or walk away from the leadership debate?

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