Clarke Inc and the CEO George Armoyan: Corporate Raider of the North? A narrative analysis

Clarke Inc. is a small Canadian diversified catalyst/activist investing company predominated driven by a larger-than-life personality: CEO George Armoyan-- a man often compared to Carl Icahn. From a quantitative perspective, this company's balance sheet and growth makes it very attractive (remember to ignore the "sales" number-- this company profits from selling investments). On the other hand, the nature of its business and the undisclosed debt accumulation that must be present for all the recent aggressive share purchases makes the business very difficult to value.

Like many asset management companies I'm interested in (i.e. Legg-Mason, Brookfield Asset Management, Berkshire-Hathaway), the shareholder puts a disproportionate amount of trust/faith in the abilities of the management. This unlike some businesses where the margins are so fat and the competition so sparse that even a bunch of idiots can run the company and make a profit and often do (some infrastructure oriented companies fit the bill here). In this analysis it's important for a potential shareholder to understand the senior management's motivations, management skill and track record. This is why I'm taking the time to discuss Armoyan et al in more detail than usual. For entertaining reading, put his name on google and read what comes up. A Globe and Mail article here.

Mr. Armoyan is no stranger to controversy and litigation. He's taken on a premier and won in the past. The Nova Scotia SEC has investigated him at least once before (and found no security violations) and just yesterday the same organization has announced that it is investigating about a purported violation committed in 2005 in the Advanced Fiber Technologies Income Fund trade. I know that he has also been criticized for using Geosam Inc (a family trust) in his maneuvers such that a potential conflict of interest may exist between the shareholders of Clarke Inc. and Geosam. To Mr. Armoyan's credit is the fact that he immediately set up a third party trust admin for Geosam so it would operate at arm's length to him.

My take is that he is a hard-nosed value hound and isn't afraid to shake people up and bend the rules a bit to get his way. He is admired and sometimes hated by more than a few folks, particularly out East. His strategy is to find small to medium sized Canadian companies (often income trusts) that are struggling despite relatively strong balance sheets, considerable tangible assets and reasonable future prospects post turnaround. Clarke Inc and sometimes Geosam Inc (a holding company with his sons designated as beneficiaries) will buy 10-15% of the outstanding shares. Then he or one of his officers will ask nicely to be invited for a seat on the board of directors. If the company balks, then George forces a shareholder vote. Armoyan's reputation for creating shareholder value and crushing anything in his way usually precedes his coming, so shareholders wisely vote with him. Once he is in place, the firing and resignations begin. Costs are slashed and company is either turned around or liquidated or sold. George has been immensely successful in doing this. Two companies that he is in the process of doing this currently are Quebec's Shermag and Granby. Some of the Shermag story is in this CBC article.

The story behind this $200 M market cap company is reminiscent of the beginning of Berkshire Hathaway. BRK started off as a failing textile business that Buffett saw as a potential turnaround situation. He had retired from his partnership a few years prior (as he saw no investable companies in the mid to late 60's overheated market) but had become bored and was looking for a new challenge. After acquiring a controlling interest in the company he soon found that the competition was fierce and the margins were slim in that particular industry. After some attempts to restructure, he gradually shut down the textile business and diverted funds into investments--- predominantly in the area of his greatest expertise, insurance. The rest of BRK and Buffett's success is well known history.


Clarke Inc. started as a failing maritimes based trucking specializing in brokering North/South freight transport. In 2000/01 Armoyan and a friend started buying up stock, got onto the board and fired pretty much everybody. I believe he realized quite soon that the trucking part of the business wasn't going to perform to meet his goal of > 15% ROE. The charts on the top of the page tell the rest of the story (click on them to enlarge the graphics so you can read them). Clarke's recent acquisitions are well documented on Yahoo. Prior to Sept 2007 an excellent presentation of the companies' accomplishments is here.

As I mentioned above the numbers for Clarke are VERY impressive:

P/E of 4 (!!)
P/B 0.93 (!)
ROE of 36% (!!)
Current ratio of 6.6 (lots of cash to service debt, pay wages etc)
Debt:Equity 0.6 (double what I'd like to see)
Major insider ownership 42% ... 17% being the CEO's family
insider buying last 4 months
share buy back December ?amount
dividend 2% yield (not bad for a small cap company!)

These numbers need to be interpreted with caution. By the nature of the business, "one time sales" tend to skew the numbers for quarters in which they occur. With the downtrend in the Canadian market, Clarke is unlikely to be divesting any of their investments anytime soon. Some of the income trusts do provide cash flow to finance other projects and cover short term expenses.

The long term success of this company pretty much relies completely on the skill of the management. Despite being a micro/small cap company, the balance sheet suggests that bankruptcy is very unlikely even if a true recession strikes this country.

The share price has recently been beaten back from $10 to just above $6 (adjusted for share splits) due to the perception of high risk investments George is undertaking of late and the SEC announcement. I suspect Mr. Armoyan and the shareholders will be rewarded for the long term. I doubt the SEC issue will stick. I do suspect that the next couple of quarters will most likely show a decrease in EPS and the share price is likely to be punished disproportionately. Having said that, I feel that at the current price of $6, the risk:reward ratio is favourable.

I do own a disproportionate number of shares of CKI.TO in my portfolio acquired from $10-$7 in increments. I have a lowball bid in for $5.99/share that I hope will be filled over the next month.

l