Turtle Beach is in a race to find a buyer or else risk total upheaval

Like Penelope when Odysseus went on his epic jaunt around Greece, Turtle Beach has been talking to hundreds of potential suitors, in the hopes of a match. Essentially, the peripheral company wants someone to buy it, to save it from itself. However, its search for love is not going well.

There's a lot to digest there, but here goes. The peripheral company best known for its cheap console headsets, simulator gear, and controllers (and owner of PC-focused brand Roccat) has been going through a period of upheaval. One that could see some of its upper management out of a job and the company's future in the hands of another in just a few months' time. It's all rather scandalous, actually.

To understand what's going on with Turtle Beach and why it's looking for a sale in the first place, you need to go back a few months to a potential buyout bid from hedge fund and part owner, Donerail.

Aggressive boardroom antics

The Donerail Group is a major shareholder of Turtle Beach, one that has been generally upset with the performance of the peripheral company. Because of that, it proposed buying the company back in August 2021. At the time, Turtle Beach's board wasn't interested, claiming it couldn't verify the legitimacy of the fund's offer.

So Donerail switched tact. It decided to instead seek the dismissal of Turtle Beach's existing board members and replace them with its own. For this, it would need the support of the company's shareholders and a successful vote at the annual shareholders meeting on June 7, 2022.

Donerail published a press release on March 22 with the names and credentials of the six people it wanted to run Turtle Beach, noting that it believed "wholesale change is urgently needed in Turtle Beach’s boardroom in order to catalyze enhanced value creation.

"For far too long, shareholders have seen the current Board preside over chronic underperformance, dismal operating results, poor capital allocation and weak corporate governance."

That didn't go down too well with the current Turtle beach board members for obvious reasons.

Turtle Beach claims it was open to discussion with hedge fund Donerail at one point in time. However, talks broke down regarding the fund's bid to buy the company, as Turtle Beach's CEO and chairman, Juergen Stark, said in a Section 14A filing with the SEC.

"The Board’s openness to value-maximizing opportunities also included our full and good faith engagement with Donerail, where we tried repeatedly to establish their financing and make their bid real and actionable," Stark says. 

"Despite our efforts, Donerail could not, or would not, verify their financing, unlike credible potential buyers."

It all got quite nasty at times. Turtle Beach held that Donerail has engaged in spreading FUD (fear, uncertainty, and doubt) designed to make it appear unworthy of being bought by any interested parties.

"Additionally, it is important to note that feedback from multiple prospective acquirers has been that Donerail’s dissemination of false and misleading information about the Company, which started mid-2021, has unfortunately deterred and discouraged them from advancing discussions with us," Stark said.

Turtle Beach also claimed on March 14, prior to Donerail's nominations going public, that it sent Donerail a letter outlining a cooperative agreement that would see both groups mutually agree on two independent director candidates to refresh the company board.

Turtle Beach published this letter in full due to, in its own words, "Donerail’s history of misrepresenting facts related to the Board and management team’s history of engagement with Donerail."

This was rejected, so Turtle Beach filed a second proposal. This would see Turtle Beach agree to choose two new independent directors from a pool of candidates including Donerail's chosen candidates.

This didn't conclude the issue, and Donerail later hit back with its own candid press release in late April, titled: "Correspondences That Expose the Turtle Beach Board’s Lack of Credibility". In which, it published a private letter to the board (sent in August 2021) offering to share financial information and emails to the company later in that same year where it requested an NDA be signed to share confidential information. Thus attempting to make it appear Turtle Beach's existing board was being unreasonable.

Due to all this bickering it appeared as though this issue was set to be decided during the vote at Turtle Beach's annual shareholder meeting on June 7; one side hoping to stave off the threat of meddling with its current board and the other hoping to be rid of the whole lot and replace them with their own in a proper coup d'état.

Temporary resolve

While you'd love to have been in the room for the vote—basically watching an episode of HBO's Succession play out in real-time—it wasn't to be. Turtle Beach's board and Donerail would come to an agreement on May 16, weeks ahead of the shareholder meeting.

Now remember those Turtle Beach proposed agreements from before? Two independent directors from a pool of candidates including Donerail's? The agreed upon settlement was absolutely not that. Donerail may have stood a chance of winning over shareholders, after all, and perhaps Turtle Beach's board understood that—Turtle Beach did not get its own way in the agreement whatsoever.

The agreement between the two groups saw the immediate appointment of three directors from Donerail's slate of candidates, and, if needed, future appointments of a Donerail director and another mutually agreed upon ninth (in total) director based on the outcome of a "Comprehensive Alternatives Process".

The Comprehensive Alternatives Process involves what's called the Strategic Committee. Basically a group on the board whose job it now is to find a suitable buyer for the company within a 120-day period.

The three directors added by Donerail were Katie Scherping, Brian Stech, and Michelle Wilson. In the shareholder's meeting, these three directors received more votes than any of the incumbent board members.

The agreement between Turtle Beach and Donerail also asked for the immediate retirement of one of Turtle Beach's board and the retirement of another Turtle Beach board member following that 120-day period, in the event the company is not sold. This would trigger that aforementioned ninth board member to be added to the board. 

If you're counting, that's three already added, then a fourth director, and swiftly following a mutually agreed upon director to make for a new total of nine board members. Making for the very real possibility that five of nine board members will be in some way chosen by Donerail.

It's not a great outcome for CEO Stark. In public, though, he's putting on a brave face.

"We are pleased to have reached a constructive resolution with Donerail that will enable us to conduct this process without the distraction of a proxy contest, while the management team continues to execute our strategy and capture the value inherent in the business," CEO Stark said of the agreement. 

"We look forward to welcoming the newly appointed directors to the Turtle Beach Board and benefitting from fresh perspectives as we work towards our collective goal of maximizing value for all stockholders."

And that basically brings you up to date with the next twist in this saga just announced. Now for the actual news.

Turtle Beach can't find a suitor

The Turtle Beach board has since set out on a strategic review process in an attempt to find alternatives to the buyout bid since the settlement was reached back in May. That's a couple of months to scour around for anyone interested in a gaming peripheral company with a big brand name attached to it.

Today, Turtle Beach has reported that it has not found any buyers from the ongoing review process, after more than half of the 120-day period allotted to the strategic committee to find a buyer has passed.

"We have conducted a robust and exhaustive review of strategic alternatives, focused on a potential sale of the Company, contacting over 100 potential acquirers, but these parties were not able to make a proposal that would deliver value to our stockholders due to a convergence of external factors, including macro-economic challenges related to supply chain constraints, inflationary concerns and a challenging consumer spending environment," William Keitel, chair of Turtle Beach's strategic committee, says.

"As a result, we [are] ultimately determined to stop proactive outreach to potential buyers but will continue to consider opportunities consistent with the Strategic Committee’s charter."

So what does that mean for Turtle Beach's board? The time is ticking down on its opportunity to find a buyer as that 120-day period comes to a close. If it is unsuccessful, the all-important majority that Turtle Beach's incumbent board holds in the boardroom, and those members' control over the company's future, will shift to a more even split with Donerail. It could potentially lean in Donerail's favour, even, thus giving the hedge fund control to do with the company what it sees fit to make the company's shareholders more money.

That could see changes to Turtle Beach and Roccat brands and how they're managed or marketed, though its new directors' exact plans should that come to pass are not yet clear.

To make matters worse for Turtle Beach, it just today announced its second quarter results, which are generally down on last year. Net revenue loss is a reported $17.8M, and the company says that's down to "ongoing macroeconomic headwinds," which is the go-to phrase of many companies in PC gaming right now—Intel and Nvidia among them.

It's really not a great time to be trying to find a buyer for your company, as everyone battens down the hatches for a few rocky quarters, if not longer.