Yellowave Run-Up Shows How ‘Buy and Switch’ Pays

Among the more unlikely transformations in the New Economy is the evolution of CutCo Industries Inc., a New York operator of budget-minded hair salons, into Brentwood-based Yellowave Corp., an incubator of Israeli technology companies.

The metamorphosis has produced a 1,900% gain in the company’s stock this year--though there is little to the business but a wad of cash and some high hopes for Net-related technologies.

Yellowave is an example of a corporate “buy and switch” game: Entrepreneurs find an existing company with public stock, acquire the business, change its name to something catchy and then issue a series of pronouncements touting its interests in technology.

Other examples include BAB Holdings Inc., a Chicago company that previously sold bagel and coffee store franchises. Its shares jumped 63% this year after the firm said it would merge with Planet Zanett Corporate Incubator Inc. and shed its bagel business.

Though it has paid off for shareholders of a number of companies, the strategy elicits considerable skepticism from Wall Street, said analyst Patrick Walravens of Lehman Bros. in New York.

He believes companies need to outline specific business plans rather than generic concepts such as, in Yellowave’s case, an incubator of Israeli tech companies. And even then, he notes, many such firms falter because of a lack of understanding of what their true business objective is.

What makes the Yellowave deal unusual is the startling appreciation in the stock--even by New Economy standards--and that the deal was put together in part with cash sitting in the coffers of CutCo.

Yellowave’s stock (ticker symbol: YW), which moved this week to the American Stock Exchange from the OTC Bulletin Board, has rocketed from under $2 at the start of the year to $17. At the current price, the company has a market capitalization of $48 million.

Yellowave also is unusual for its connection to one of the tech world’s luminaries. Eric Benhamou, who built Santa Clara-based 3Com Corp. from a small merger into a $6-billion company before spinning off its $1-billion Palm Inc. business in March, owns about 20% of Yellowave, thanks to the firm’s acquisitions of Israeli companies in which Benhamou was a partner.

Benhamou, who declined to be interviewed for this article, is chairman of both 3Com and Palm.

CutCo’s evolution into Yellowave began last year at the computer of Los Angeles deal maker Ron Oren. After previously dabbling in real estate, Oren set out to find a public company he could turn into a tech company.

“I was looking for the best vehicle to expose Israeli tech businesses to the American market,” Oren said. “The shortcut was to find an existing company that was already trading.”

Culling through computer databases, Oren sought a company with a small number of shares, no debt, no pending lawsuits and a tidy sum of cash in the bank.

Founded in 1955, CutCo fit all of the parameters. It had been in and out of the pizza business and other ventures and was about as far off Wall Street’s radar screen as any of the roughly 14,000 U.S. stocks.

Better yet, it had only two officers, elderly founders who controlled the stock.

About a year ago, founders Marvin W. Marcus and Don vonLiebermann sold 300,000 CutCo shares--about 35.4% of the company--to Oren’s Shera Corp. for $1.2 million. Shera paid part of its attorney’s fees for the deal with a $1.4-million loan obtained from CutCo, Oren said. Shera repaid the loan, at 8% interest, last week, he said.

Marcus and vonLiebermann agreed to resign, each receiving a termination fee of $100,000. They also have collected at least an additional $32,000 each under consulting agreements with the company, according to regulatory filings.

Oren moved the company to Los Angeles and sold its remaining salons to Regis Corp. for $3.6 million.

With Laura Ballegeer, Oren’s former wife, as chief executive, Oren then set out to use contacts in his native Israel to find promising wireless and telecom firms to buy.

News of CutCo’s transformation to Yellowave was announced in early March--just in time to ride the last big wave up in U.S. tech stocks. As the stock surged, it gave Oren a richer currency to use in acquiring companies.

Yellowave’s first two deals, agreements to purchase Mobix Communications Ltd. and FibroLan Ltd. for stock, were announced in late March. But the Mobix purchase is still pending and the FibroLan deal was abandoned.

Over the last two months, Yellowave has completed deals with a group controlled by Benhamou and an Israeli associate, Prosper Abitbol. The deals gave Yellowave control of four companies: Yoopyah, ICom4U, NewS@t and Free. All four deal with ways to blend video, TV and the Internet. NewS@t holds one of Israel’s two licenses to offer direct broadcast satellite TV.

Oren said he agreed that Abitbol would become chief executive of Yellowave because of his experience in running companies. Ballegeer now is chief operating officer.

Oren, now a “senior consultant” looking for more deals, gave up his president’s post but wound up with a tidy paper profit. His Yellowave stock is worth about $24 million.

But the business itself has only about $5 million in cash, a microscopic sum compared with the notorious amount of money incubators are known to burn through. Meanwhile, the company has yet to earn a dime or collect any meaningful revenue.

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Wave Rider

Shares of Yellowave Corp. (ticker: YW) have rocketed this year as the former hair-salon chain has morphed into an Internet incubator. The stock this week shifted from the OTC BulletinBoard to the American Stock Exchange.

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Yellowave shares, weekly closes and latest

Tuesday: $17.00, unchanged

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Source: Bloomberg News