Hudson Global's Merger and Preferred Stock Dividend Strategy: A Tax-Driven Path to Shareholder Value

The recent merger between Hudson Global (HSON) and Star Equity Holdings (STRR) has created a compelling case study in how strategic tax planning and revenue diversification can unlock long-term shareholder value. By combining $240 million in U.S. federal net operating losses (NOLs) with a newly diversified revenue base of $210 million, the rebranded Star Equity Holdings is positioning itself as a high-conviction play for investors seeking both income and growth in a post-merger environment.

The Tax Tailwind: NOLs as a Strategic Asset

Hudson Global's $240 million in NOLs, reported as of December 31, 2024, are no longer a liability but a powerful tool for future profitability. The merger with Star Equity Holdings—a company with its own $44.6 million in federal NOLs—creates a larger entity with a broader revenue stream. This diversification across four segments—Building Solutions, Business Services (Hudson RPO), Energy Services, and Investments—reduces sector-specific risks and increases the likelihood of generating taxable income to offset the NOLs.

The tax benefits are straightforward: as the combined company grows, it can use these losses to reduce future tax obligations, effectively turning a drag on the balance sheet into a catalyst for cash flow. For example, if Star Equity Holdings achieves its goal of $40 million in Adjusted EBITDA by 2030, the NOLs could save the company tens of millions in taxes, boosting net income and free cash flow. This creates a virtuous cycle—higher earnings, lower taxes, and more capital to reinvest or return to shareholders.

Preferred Stock: A 10% Dividend with Tax-Protected Upside

The merger's preferred stock structure is a masterstroke for income-focused investors. Star's preferred shareholders received one share of Hudson's 10% Series A Cumulative Perpetual Preferred Stock (HSONP) for each share held. This preferred stock offers a fixed 10% dividend, which is cumulative (unpaid dividends accrue and must be paid before common dividends) and perpetual (no maturity date).

The key here is the interplay between the preferred dividend and NOL utilization. While the company must prioritize paying preferred dividends, the NOLs allow it to retain more earnings by reducing tax liabilities. This means the cash flow generated from operations can be allocated to meet preferred obligations without eroding the value of the NOLs. For instance, if the combined entity generates $20 million in pre-tax income in 2026, the NOLs could reduce its tax burden to near zero, leaving $20 million in after-tax cash to service the $10 million in preferred dividends (assuming a 10% yield on $100 million in preferred shares).

Revenue Diversification: A Shield Against Volatility

The merger's strategic brilliance lies in its ability to spread risk across industries. The Building Solutions segment, which includes modular construction and energy-efficient materials, is insulated from economic downturns due to long-term infrastructure demand. Meanwhile, the Business Services division (Hudson RPO) taps into the booming talent management market, and Energy Services benefits from the global shift to geothermal and water-well technologies.

This diversification isn't just defensive—it's offensive. By operating in four distinct sectors, Star Equity Holdings can leverage cross-selling opportunities and economies of scale. For example, Building Solutions could use Energy Services' tools for modular construction projects, while Hudson RPO's recruitment expertise could help Energy Services scale its workforce. This interconnectedness creates a flywheel effect, where growth in one segment fuels momentum in others.

The Russell 2000 Playbook

The combined company's size and revenue diversity also position it for inclusion in the Russell 2000 index. Such a listing would attract institutional investors chasing index-linked portfolios, boosting liquidity and share price. The NOLs and preferred stock structure further enhance this appeal by offering a tax-efficient, income-generating profile that aligns with the index's focus on mid-cap growth.

Risks and Realism

No strategy is without risks. The success of this merger hinges on the effective integration of Star's and Hudson's operations, as well as the timely utilization of NOLs. If the company fails to hit its $40 million Adjusted EBITDA target by 2030, the tax benefits may not materialize as expected. Additionally, the preferred stock's cumulative nature means that any missed dividend payments could accumulate, creating pressure on future cash flows.

However, the management team—led by CEO Jeff Eberwein and COO Rick Coleman—has a track record of executing complex transactions. Their ownership stake in the combined entity (24% of pro-forma shares) aligns their interests with shareholders, adding a layer of accountability.

The Bottom Line: A Tax-Driven Dividend Play

For investors, the merger represents a rare combination of tax advantages and income generation. The 10% preferred dividend offers a compelling yield, while the NOLs and diversified revenue streams provide a buffer against volatility. If the company achieves its growth targets, the preferred stock could become a cornerstone of a high-conviction portfolio.

Actionable Takeaway: Consider allocating a portion of your portfolio to HSONP for its income potential, while monitoring the company's progress toward NOL utilization and Russell 2000 inclusion. For those with a longer time horizon, the common stock (HSON) offers upside if the merger's synergies drive earnings growth.

In a market obsessed with short-term gains, Hudson Global's merger reminds us that patience and tax discipline can unlock extraordinary value. This is a story about turning losses into profits—and dividends into dividends.