One of the big questions I’ve had all along is whether American Capital actually knew it was buying into an arbitrage play with Geosign, or whether the private equity company really believed, as its press release made out, that it was getting a share of an innovative internet publisher. I lean toward American Capital getting suckered due to 1) the wall of silence and 2) this indiscretion on the part of Geosign founder Tim Nye 3) the fact that Mark McQueen has good sources and a job that requires him to be careful about what he says.
The argument against American Capital being played for fools is that they did tremendous due diligence, yada, yada, yada, but there are plenty of stories about investors who supposedly did their due diligence losing everything.
Even those who concede that American Capital may have been fooled, like to point out $160 million is just a drop in the bucket for such a big player, and that the Geosign split wasn’t even announced as it wasn’t considered material to the company’s results. While that may be true, the Geosign debacle says that the people who worked on this deal didn’t have a clue what they were doing. It should have been clear to anyone — let alone supposed technology experts with MBAs and very large salaries to justify — that something was very strange about Geosign and Tim Nye.
None of this looks good for American Capital so it’s hardly surprising that, according to TheStreet.com, 7% of its stock is being shorted.
AnnBrocklehurst.com 
Ann,You’ve got it mostly right. As a former Geosign employee, I can tell you that American Capital did know exactly the business model, and its reliance on Google. Further, they knew that at least one major property, Truelocal.com, had been “turned off” by Google months prior to the deal closing. They also knew that that effect could be repeated across all sites, essentially taking about 90% out of the business’ revenue. Apparently, American Capital made that bet. Unfortunately Google made their decision just weeks after the deal closed. I think that’s why American Capital has been so quiet. I was a lowly employee but could see the achilles heal of the revenue model as easy as anyone. (it was no secret among employees) As wild as Geosign was, I don’t think anyone at American Capital could say they were mislead.
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Thanks for commenting.If you don’t mind me asking, how did you become privy to this info: pillow talk, long night out at the bar?
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See http://www.financialpost.com/magazine/story.html?id=324817for the best summary yet.
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