Lieutenant General James Abrahamson Matthew O’Connell GeoEye Inc. 21700 Atlantic Boulevard Dulles, VA 20166
March 18, 2008
Dear Lieutenant General Abrahamson and Mr. O’Connell:
My investment firm is a holder of shares in GeoEye. We are writing to express some concerns we have about the company and hope that this letter can serve as the starting point for a discussion, leading to subsequent actions to help support an increase in value in the price of the company’s stock.
First, let me congratulate you both on the company’s success over the past year. The stock’s price has appreciated 62% and it continues to attract a wider following from institutional and individual investors. Operational results – as evidenced in last week’s earnings call – continue to steam ahead strongly.
The board and management team have demonstrated that you can move effectively in dealing with challenges, such as the OrbView-3 failure. The insurance settlement ended up more than compensating shareholders for that difficulty and showed that you could effectively scenario plan for the company. GeoEye 1 – your next satellite due for launch later this year – should prove to help power the company to even more success this year.
We believe this is not a broken company in need of restructuring and new people. Rather, we believe GeoEye is an undiscovered gem by investors. Once others truly understand the many positives going for GeoEye, we are confident they will reward it with a much higher stock valuation. You both, as well as your fellow directors and the entire management team, are responsible for ensuring that other current and prospective investors truly understand that potential.
Below, we outline the actions we believe are needed to achieve such a positive outcome.
- Raising GeoEye’s P/E ratio to be in line with Peers’
o The Problem:
§ At the moment, GeoEye’s trailing P/E is only 12.66. Yet, you have projected to grow GeoEye’s earnings at 20% a year over the coming 5 years. Competitors such as Orbital Sciences sell at a trailing P/E of 25.5 and Trimble Navigation has a trailing P/E of 29.75. If GeoEye sold for just a P/E of 20, the result would be a 58% increase in the price of the stock to $45.82. If GeoEye was trading at a premium to its peers (which we believe it deserves) of 40x, its stock price would appropriately be valued at $62.62. (We are still waiting for your most direct competitor to go public.)
o The Solution:
§ We believe that the reason for the market’s failure to see the inherent value in GeoEye is that the company has done an insufficient job in articulating its strategy moving forward. It’s not enough to simply estimate to investors when GeoEye 1 will launch – or your plans for GeoEye 2, for that matter. Investors want to know what you will be able to provide to your customers better than your competitors and in a sustained fashion. We believe that, with a much more focused and vigorous explanation of GeoEye’s inherent value relative to its peers, the market would properly value the company.
- Rectify Earnings Delay
o The Problem:
§ Despite strong revenues announced during last week’s quarterly call with analysts and investors, the company was immediately punished with the Stock falling from $33 to $28. The reason was your inability to communicate your 2007 earnings or EPS, because of not being in a position to know how to account for Net Operating Losses from a smaller acquisition done earlier last year.
o The Solution:
§ These days, the markets abhor uncertainty. Investors shoot first and ask questions later – sometimes when it’s unwarranted, as is the case here. We believe that the market is over-reacting. However, this is partly management’s fault for not moving more swiftly earlier in 2007 to gain clarity on this point. You state that you expect to file your 10-K on time by the end of the month (in 2 weeks). We urge you to get this information out to the market as soon as possible and not find yourself in this kind of situation again.
- A Better Board with More Stock Ownership
o The Problem:
§ We believe GeoEye has an esteemed group of directors and we appreciate their service to the company. However, there is a disproportionate share of directors with government/military backgrounds, as well as lawyers and accountants. We have nothing against these backgrounds (the government, after all, accounts for over half of GeoEye’s revenues) or professions. Our concern is that there are no directors who represent the perspective of your commercial customers. We believe this is a major opportunity for improving the oversight of the board. Additionally, we are concerned about the stock ownership levels of your outside directors. In research I collaborated on while at Columbia Business School, which was funded by McKinsey and Korn/Ferry, we found that no single governance characteristic mattered more to positively increasing a company’s subsequent share performance than the percentage of outside directors on the board who held meaningful equity stakes which they purchased themselves (the paper summarizing the study is here: http://www.jacksonleadership.com/whats_new/Linchpin.pdf ).
o The Solution:
§ The solution to improving the board and its positive impact on company performance comes in two forms:
· 1. We urge the board to look for possible directors with a commercial background and seek to bring them on to the board as quickly as possible.
· 2. We ask you to do a full review of your current outside directors and their stock ownership. We caution you to remember that we do not believe stock holdings are the same as stock which someone has dug into their own pockets and purchased as a motivator and as a subsequent predictor of future stock appreciation. You have some directors whose stock holding likely have only come through grants and options paid to them for their service – the equivalent of “found money.” We would like to seek each of GeoEye’s outside directors purchasing at least $500,000 in stock within the next 6 months. Purchasing $1 million in stock each would be better, but we recognize that each director’s personal financial situation is different.
We would not be a shareholder in this company if we didn’t believe GeoEye had a bright future. We believe the points outlined in this letter will allow you and other shareholders to recognize significantly more value in our stockholdings sooner than if you did not follow them.