Ancora Advisors Sends Letter to the Board of Directors of Rush Enterprises Inc.

CLEVELAND, Dec. 10, 2014 /PRNewswire/ -- Ancora Advisors LLC announced today that it has sent the attached letter to the Board of Directors of Rush Enterprises Inc.  The letter, written by Ancora's Chief Executive Officer and Executive Chairman Mr. Fred DiSanto, details the merits of collapsing Rush Enterprise's dual class share structure, arguing that the structure has been a significant factor in Rush's shares underperforming a select group of comparable companies.

A limited partnership advised by Ancora Advisors LLC as the General Partner, separately sent the Board of Directors of Rush Enterprises Inc. a proposal pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, calling for the collapse of the company's dual class structure, for inclusion in the company's proxy statement for the 2015 annual meeting of shareholders.

Ancora believes that not only does the dual class structure cause underperformance but that the rationale for establishing a dual class structure is no longer warranted.  Rush's agreement with Peterbilt requires the Rush Family and management to hold a minimum of 22% of the votes, a level Ancora believes is low to the point it is insignificant and pointless.  The Peterbilt agreement is already protected, and would remain in effect after collapsing the dual class structure, through an existing change of control clause.  Further, Mr. DiSanto noted that the company would be better off implementing a staggered board than continuing with a value destructive, ineffective dual class structure.

Ancora's analysis demonstrated that Rush's stock underperformed despite the fact it has grown sales over 89% and EBITDA over 100% during that time frame, performance that is superior to the comparable companies:

Ancora believes that collapsing the dual class equity structure is the most practical solution to the underperformance issue.   By collapsing the dual class structure, all shareholders would have an equal one share, one vote share class structure, and will benefit from an increased valuation that should materialize by eliminating the dual class structure.

December 8, 2014

Board of Directors
Rush Enterprises, Inc.
555 I.H. 35 South, Suite 500
New Braunfels, Texas 78130

Dear Board of Directors:

We write to you as a significant shareholder of the super-voting class of Rush Enterprises, Inc. Ancora, on behalf of its clients, currently controls over 4% of the voting power of the Company.  The intent of this letter is to inform you we have submitted (in a separate letter) a non-binding resolution to eliminate the Company's dual class share structure at the next shareholder annual meeting.  Despite Rush's outstanding growth and operating performance over the past five years, the return on the company's stock has lagged behind a set of comparable companies.  We believe that Rush's dual-class equity arrangement is anchoring the company's stock price, and collapsing the share class structure is the most practical remedy.  Our thesis is based on strong empirical evidence and numerous academic studies.  Furthermore, nearly every institutional investor organization that has taken a position on the matter has come out against the dual-class share structure including Institutional Shareholder Services (ISS), The Council of Institutional Investors (CII), CalPERS, OTPP, and the list goes on.  We understand the rationale behind the dual-class share structure at Rush and believe it is unwarranted.

The Rush family and current management can maintain control of the company by instituting a staggered board while eliminating the dual-class equity structure.  The Peterbilt agreement requires the Rush Family and management to hold a minimum of 22% of the votes.  We believe 22% is low to the point it is insignificant and pointless.  A staggered board would have the same effect and at the same time, the new arrangement would not eliminate a host of potential shareholders (institutional investors, mentioned above that explicitly do not buy stakes in companies with dual-class shares).  We believe this solution would eliminate the chronic valuation discount applied to the market value of Rush's equity.

Empirical evidence reveals negative valuation consequences and equity share price underperformance for stocks that maintain a dual-class equity structure.  Extreme Governance: An Analysis on Dual-Class Firms in the United States demonstrates that firm valuation is negatively affected by a divergence between cash flow rights and voting rights (the "WEDGE" factor defined as voting rights minus cash flow rights)¹.  In other words, the greater the difference between the insiders' voting rights and their economic rights (i.e., rights to cash flow), the more negative the effect is on the company's stock price.  Another study completed by the IRRC Institute, New Study Says Multiclass Voting Companies Underperform illustrates that companies with two classes of shares, both of which are traded publicly, underperform over most time periods measured².  This evidence gives us reason to believe Rush's stock would have achieved a higher valuation and greater returns if the company had one equity share class.  To that end, we can take practical steps to solve this problem and all shareholders would benefit through multiple expansion as the stock's valuation discount vanishes.

In analyzing the Company's relative share price performance, we considered five companies: Lithia Motors (LAD); Penske Automotive (PAG); Asbury Automotive (ABG); Group 1 Automotive (GPI); and Sonic Automotive (SAH).  While the Board may argue about the validity of the inclusion of any of these companies as comparable, we believe the data supports our belief that this comparable group is appropriate.  First, from a subjective standpoint, the comparables all operate in the same industry and have very similar operating models.  Second, from a quantitative standpoint, the dispersion of the comparables valuation multiples is relatively low, meaning the market is valuing the businesses similarly.  To establish a reference point, we examined the dispersion of the EV / EBITDA multiples of six comparables in the fast-food restaurant industry, an industry that has very similar comparables (Wendy's, Burger King, McDonald's, YumBrands!, Jack in the Box, and Popeyes).  We removed Burger King because it is currently involved in a merger transaction and the dispersion (or standard deviation) of EV / EBITDA for the group was 3.2 compared to a standard deviation of 2.2 for the RUSH comparables.  This relatively tight dispersion gives us confidence the comparables are legitimate and our analysis is valid.

We examined 3-year and 5-year holding periods³, and then compared the company's stock and operating performance to the comparables group.  The results are predictable in light of the studies we reference above.  Over the 3-year holding period, RUSHA returned just over 96% to shareholders while the median of the comparables group returned over 128%.  Rush's stock underperformed despite the fact it has grown sales over 89% and EBITDA over 100% during that time frame.  Meanwhile, the comparable companies median growth rate of revenues was only 12% and EBITDA 80%.  The bottom line is that while Rush bested its competition's operating performance, its stock price (and total return) has lagged behind.  The same is true for the 5-year holding period.  While stock performance has been similar- RUSHA returned over 236% compared to the comparable companies median total return of 240%, Rush significantly outperformed its peer group with regard to operating performance. Over the period Rush grew sales by 225% (vs. median for comps of 63%) and EBITDA advanced over 681% (compared to comps median growth of 140%).  Furthermore, it is clear that Rush trades at a valuation discount:

We believe that collapsing the dual class equity structure is the most practical solution to this problem, and it appears the company's charter would not be restrictive.  As a significant shareholder of RUSHB shares, we would be willing to give up the excess voting power in exchange for the increased liquidity and share price appreciation we believe the stock would experience.  Meanwhile, in addition to the stock price appreciation, RUSHA holders would benefit from the increased relative voting power of their shares.  Both shareholder groups would benefit from an increased valuation that, according to the studies cited above, should materialize by eliminating the dual class structure.  Because both groups of shareholders would stand to benefit, we encourage the board of directors to endorse our proposal to collapse the share class structure at the next annual meeting.

We are open to exploring alternative remedies (there are several) if eliminating the dual class structure is implausible.  We have included references to literature on the subject matter in the Appendix.  Thank you.

Regards,

Fred DiSanto
Chief Executive Officer and Executive Chairman
Ancora Advisors LLC

¹ Gompers, Paul A. and Ishii, Joy L. and Metrick, Andrew, Meetings; Rodney L. White Center for Financial Research Working Paper No. 12-04; Rock Center for Corporate Governance Working Paper No. 39.
² IRRC Institute, Controlled Companies in the Standard and Poor's 1500: A Ten Year Performance and Risk Review. October 2012.
³ Performance figures taken from FactSet and current as of the date of this letter

Appendix

Gompers, Paul A. and Ishii, Joy L. and Metrick, Andrew, "Extreme Governance: An Analysis of Dual-Class Companies in the United States," (May 1, 2008).
Website: http://dx.doi.org/10.2139/ssrn.562511

IRRC Institute, "Controlled Companies in the Standard and Poor's 1500: A Ten Year Performance and Risk Review," October, 2, 2012.
Website: http://irrcinstitute.org/projects.php?project=61

ISS, "The Tragedy of Dual Class Commons," February 13, 2012.
Website: http://online.wsj.com/public/resources/documents/facebook0214.pdf

Council of Institutional Investors position on Dual-Class Stock
Website: http://www.cii.org/dualclass_stock

CalPERS, "Global Principles of Accountable Corporate Governance," pg. 29, 8.3.1, November 14, 2011.
Website: http://www.calpers-governance.org/principles/home

The Canadian Coalition for Good Governance (CCGG), "Dual Class Share Policy," September 2013.
Website: http://admin.yourwebdepartment.com/site/ccgg/assets/pdf/Dual_Class_Share_Policy.pdf

Parliament of Canada, "Dual-Class Share Structures and Best Practices in Corporate Governance," August 18, 2005.
Website: http://www.parl.gc.ca/Content/LOP/ResearchPublications/prb0526-e.htm

Gladman, Kimberly, "The Dangers of Dual Share Classes," May 21, 2012.
Website: http://blogs.law.harvard.edu/corpgov/2012/05/21/the-dangers-of-dual-share-classes/

About Ancora Advisors

Ancora Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  Ancora offers comprehensive investment solutions for institutions and individuals in the areas of fixed income, equities, global asset allocation, alternative investments and retirement plans.  A more detailed description of the company, its management and practices are contained in its "Firm Brochure" (Form ADV, Part 2A). A copy of this form may be received by contacting the company at: 6060 Parkland Boulevard, Suite 200 Cleveland, Ohio 44124, Phone: 216-825-4000, or by visiting the website, www.ancora.net/adv

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