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Archive for January, 2009

Wesley Gray, who occasionally drops by here to provide some high quality commentary, has launched his maiden hedge fund, “Empirical Search Strategies.”

The fund follows a “long-biased micro-cap equity strategy,” which means it invests in “special situations opportunities such as liquidations and companies selling for less than cash value.” Sounds like a good strategy to us.

The fund is down 12.56% since its September launch, which compares favorably with the performance of the Russell 2000 Index (down more than 39% during the same period).

Gray is completing his Ph.D. at the University of Chicago Booth School of Business.

You can read more about Gray’s strategy in the FinAlternatives article Ten Hut! Ex-Marine Launches Long/Short Hedge Fund or Gray’s own website Empirical Finance Research Blog.

Congratulations, Wes. We hope to see you here more often.

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Walter Schloss might be one of Benjamin Graham’s lesser-known disciples, but to Warren Buffett, perhaps Graham’s most famous disciple, Schloss is a “superinvestor.” In The Superinvestors of Graham-and-Doddsville, an article based on a speech Buffett gave at Columbia Business School on May 17, 1984 and appearing in Hermes, the Columbia Business School magazine, Buffett said of Schloss:

Walter never went to college, but took a course from Ben Graham at night at the New York Institute of Finance. Walter left Graham-Newman in 1955 and achieved the record shown here over 28 years.

Here is what ‘Adam Smith’ – after I told him about Walter – wrote about him in Supermoney (1972):

He has now connections or access to useful information. Practically no on in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that’s about it.

Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that’s all he does. He doesn’t worry about whether it’s January, he doesn’t worry about whether it’s Monday, he doesn’t worry about whether it’s an election year. He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do – and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on Walter. That’s one of his strengths; no one has much influence on him.

This is Schloss’ record, extracted from Buffett’s article (click to go the article for the full-size table on page 7):

walter-schloss-record1

Over 28 1/4 years between 1955 and the first quarter of 1984 (when Buffett wrote the article), WJS Limited Partners returned 5,678.8% and in the WJS Partnership returned an astonishing 23,104.7%. Annualised, that’s 16.1% in WJS Limited Partners and 21.3% in the WJS Partnership. Both dwarf the S&P’s gain of 887.2% or 8.4% annually over the same period.

Fast forward 24 years to a February 2008 Forbes article titled, Experience:

Although he stopped running others’ money in 2003–by his account, he averaged a 16% total return after fees during five decades as a stand-alone investment manager, versus 10% for the S&P 500–Schloss today oversees his own multimillion-dollar portfolio with the zeal of a guy a third his age.

The Experience article highlights a few things about Schloss that we really like (mostly because they coincide with Greenbackd’s views on investing). First, he’s an asset investor:

“Most people say, ‘What is it going to earn next year?’ I focus on assets. If you don’t have a lot of debt, it’s worth something.”

Schloss had earlier discussed his preference for assets over earnings at the New York Society of Security Analysts (NYSSA) dedication of the Value Investing Archives in November 2007 (from the article NYSAA Value Investing Archive Dedication: Walter Schloss by Peter Lindmark):

“We try to buy stocks cheap.” His investment philosophy is based on equities which are quantitatively cheap and he often holds over 100 securities. Although he expounds that, “Each one is different. I don’t think you can generalize……But I think you just have to look at each situation on its own merits and decide whether it’s worth more than its asking price.” He prefers to buy assets rather than earnings. “Assets seem to change less than earnings.”

Second, as Buffett pointed out in his article, he’s not particularly interested in the nature of the business:

Schloss doesn’t profess to understand a company’s operations intimately and almost never talks to management. He doesn’t think much about timing–am I buying at the low? selling at the high?–or momentum.

Lindmark’s article also notes Schloss’ disinterest in the underlying business:

Mr. Graham simply did not care, and tried to purchase securities strictly on a quantitative basis. Mr. Schloss advocated buying decent companies with temporary problems. He stated, ” Warren understands businesses – I don’t. We’re buying in a way that we don’t have to be too smart about the business….”

Finally, we have to admit that we admire Schloss’ gentlemanly approach to running his business:

Typical work hours when he was running his fund: 9:30 a.m. to 4:30 p.m., only a half hour after the New York Stock Exchange’s closing bell.

You can see Schloss speaking here at the Ben Graham Center For Value Investing, Richard Ivey School of Business. Our favorite line:

If this doesn’t work, we can always liquidate it and get our money back.

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ARC Wireless Solutions (NASDAQ:ARCW) is a net cash stock with an activist investor, Brean Murray Carret, disclosing a 13.9% position on November 3 last year. ARCW closed yesterday at $2.86, giving it a market capitalization of just $8.8M. We estimate its liquidation value to be 57% higher at $13.9M. Brean Murray Carret’s original 13D filing disclosed its intention to tip out ARCW’s board and “nominate an alternative slate of directors for election to [ARCW’s]’s Board of Directors at the earliest possible opportunity.” Its subsequent 13D filing indicated that this occurred quickly, and Brean Murray Carret’s nominees were elected by the board of ARCW on November 12, 2008. This bodes well for the company chances of taking a new, shareholder-friendly direction.

About ARCW

ARCW is a provider of wireless network components. The company designs and manufactures antennas and related wireless communication systems, including cellular base station, mobile, cellular, conformal and flat panel antennas. ARCW also designs and distributes cable in the United States through original equipment manufacturers, retailers and the Internet. The company’s investor relations website is here.

The value proposition

ARCW’s most recent 10Q shows a loss-making, generally cash-consuming company. The company’s balance sheet has, however, retained some value (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

arcw-summary

The value on ARCW’s balance sheet is as a result of its sale in 2006 of its wholly owned subsidiary Winncom for $17M. The company has since burned through some of that cash, but it does still have a net cash value of $12.5M or $4.04 per share. We estimate its liquidation value to be slightly higher at $13.9M or $4.49 per share.

The catalyst

Brean Murray Carret filed its original 13D notice in November last year, disclosing a 13.9% position in ARCW and calling for the removal of the board:

[Brean Murray Carret] intend to nominate an alternative slate of directors for election to [ARCW]’s Board of Directors at the earliest possible opportunity.

Brean Murray Carret amended its 13D filing later in November, by which time it had secured the board:

The annual meeting of shareholders of [ARCW], which was scheduled to occur on November 5, 2008, was adjourned until November 19, 2008. On November 17, 2008, [ARCW] announced that on November 19, 2008, the annual meeting of shareholders will be adjourned until a later date for which [ARCW]’s shareholders will be sent a written notice along with updated proxy materials for the meeting.

Effective November 12, 2008, Sigmund A. Balaban, Donald A. Huebner, Randall P. Marx and Robert E. Wade have resigned as members of [ARCW]’s Board of Directors. Messrs. Balaban, Huebner and Wade also resigned as members of the Board’s Audit Committee and Compensation Committee and Mr. Marx resigned as Chairman of the Board. In connection with their previously disclosed intention, [Brean Murray Carret]’s proposed Viktor Nemeth and Marco Vega to fill the vacancies thereby created on [ARCW]’s Board of Directors. [Brean Murray Carret]’s nominees were elected by the Board of Directors on November 12, 2008. [Brean Murray Carret]  expect that their nominees, and Jason Young, a current director, will be nominated for election to [ARCW]’s Board of Directors at the annual shareholders meeting as adjourned.

Effective November 12, 2008, Jason Young was appointed to serve as Chairman of the Board. Effective November 18, 2008, Randall P. Marx resigned as Chief Executive Officer and Secretary of [ARCW] and Jason Young was elected to serve as interim Chief Executive Officer.

Conclusion

ARCW is undervalued at $2.86 with a net cash value of $12.5M or $4.04 per share and a liquidation value of $13.9M or $4.49 per share. Whether it continues to be so will depend on the steps taken by the Brean Murray Carret. The value that remains on the balance sheet derives from the sale in 2006 of ARCW’s wholly owned subsidiary, Winncom, for $17M. Given ARCW’s marginal business prospects, with any luck Brean Murray Carret plans to pay out the cash received from the sale of Winncomm and then do what it can with the business.

ARCW closed yesterday at $2.86.

The S&P500 Index closed yesterday at 845.71.

[Full Disclosure:  We do not have a holding in ARCW. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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The board of Avigen Inc (NASDAQ: AVGN) has announced that it will review BVF’s tender offer and advise AVGN’s stockholders of the board’s position by February 6.

We’ve been following AVGN (see archived posts here) because it’s a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities) and specialist biotechnology activist fund BVF has been pushing it to liquidate and return its cash to shareholders. MediciNova Inc (NASDAQ:MNOV) has made an offer for AVGN that represents a clever way for AVGN’s stockholders to receive cash equivalent to that which they would receive in a liquidation (less $7M to be paid to MNOV) with the possibility for “an extraordinary, uncapped return” if MNOV is successful post-merger. We estimate AVGN’s net cash at around $1.22 per share (BVF estimates $1.20 per share), which is 30% higher than AVGN’s $0.94 close yesterday.

AVGN’s press release is as follows:

Avigen, Inc. (Nasdaq: AVGN), a biopharmaceutical company, today confirmed that BVF Acquisition LLC, a wholly owned subsidiary of Biotechnology Value Fund, L.P. (collectively, “BVF”), had commenced an unsolicited tender offer to purchase all of the outstanding shares of Avigen’s common stock that BVF does not already own for $1.00 per share in cash.

Avigen’s Board of Directors, consistent with its fiduciary duties, and in consultation with its financial and legal advisors, will carefully review and consider BVF’s unsolicited tender offer and will, on or before February 6, 2009, advise Avigen’s stockholders of the position of the Board of Directors regarding the offer as well as the reasons for the position taken.

Accordingly, Avigen’s Board of Directors urges Avigen’s stockholders to defer making a determination whether to accept or reject BVF’s unsolicited tender offer until they have been advised of the position of the Board of Directors.

[Full Disclosure: We have a holding in AVGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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Ikanos Communications Inc (NASDAQ:IKAN) is a net cash stock that has retained a financial advisor to “assist it in exploring and evaluating strategic alternatives to maximize shareholder value.” IKAN closed yesterday at $1.14, giving it a market capitalization of $32.9M. Based on its September 10Q, we estimate the company’s liquidating value to be more than 90% higher at $63.2M or $2.19 per share. IKAN’s liquidating value is predominantly cash, and it has a net cash value of $41.2M or $1.43 per share. With a deeply undervalued stock and a board and management taking proactive steps to realise the value, we think IKAN presents a good investment opportunity.

About IKAN

IKAN is a developer and provider of semiconductors and silicon and software solutions for “interactive triple-play broadband.” Its customers consist primarily of original design manufacturers (ODM), contract manufacturers and original equipment manufacturers (OEMs), such as NEC Corporation, Sagem Communications, Uniquest Corporation and Altima. Its customers include Alcatel-Lucent, Dasan Networks, Inc., Innomedia, Inc. and Millinet Co., Ltd. The company’s investor relations website can be found here.

The value proposition

As its September 10Q demonstrates, IKAN’s income statement is a horror show. The company has consistently generated losses for the last five quarters. IKAN’s balance sheet has some value (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

ikan-summary

$66.2M of IKAN’s $85.8M current asset value is in cash. After deducting total liabilities of $25M, we estimate IKAN’s net current asset value at $60.8M, and its liquidating value at $63.2M or $2.19 per share. IKAN’s net cash value is $41.2M or $1.43 per share.

Contractual commitments and Off-balance sheet arrangements

According to the September 10Q, IKAN does not use off balance sheet arrangements with unconsolidated entities or related parties, nor does it use other forms of off balance sheet arrangements such as special purpose entities and research and development arrangements. Its liquidity and capital resources are not subject to off balance sheet risks from unconsolidated entities. IKAN leases office facilities, equipment and software under “non-cancelable” operating leases. Its contractual obligations as of September 28, 2008 are around $4.7M in total. In the normal course of business, IKAN provides indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant, but IKAN is unable to estimate the maximum potential impact of these indemnification provisions on its future consolidated results of operations.

The catalyst

The company disclosed in its September 10Q that it has retained investment bankers to advise the board about IKAN’s strategic options:

We recently decided to retain Barclays Capital (formerly Lehman Brothers) to provide financial advice regarding potential strategic options for the Company. Such options include, without limitation, financing transactions, acquisitions, strategic partnerships, corporate restructuring and other activities. There can be no assurance that the evaluation of our options will result in the identification, announcement or consummation of any transaction. If the Board of Directors does decide to authorize a transaction, that decision could cause significant volatility in the price of the Company’s outstanding common stock. Moreover, any transactions we do sign may not be acceptable to our stockholders. In addition, our investigation of strategic options may result in added costs, potential loss of customers and key employees as well as management’s distraction from ordinary-course business operations.

There seems to be some appetite for acquisitions in this industry. IKAN competitor Centillium Communications Inc (NASDAQ: CTLM) was acquired in October last year.

Conclusion

At $1.14, IKAN is trading at a little over half its liquidating value of $2.19 per share. With the board proactively seeking a new strategic direction, which might include “financing transactions, acquisitions, strategic partnerships, corporate restructuring and other activities,” we think there’s a good chance that IKAN can realise at least its liquidating value. We’re adding IKAN to the Greenbackd Portfolio.

IKAN closed yesterday at $1.14.

The S&P500 Index closed yesterday at 836.57.

Hat tip to Steven Lobo.

[Full Disclosure:  We do not have a holding in IKAN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Biotechnology Value Fund (BVF) announced that it has commenced its cash tender offer to purchase any and all of the outstanding common stock of Avigen Inc (NASDAQ: AVGN) that BVF does not own at $1.00 per share.

We’ve been following AVGN (see archived posts here) because it’s a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities) and specialist biotechnology activist fund BVF has been pushing it to liquidate and return its cash to shareholders. MediciNova Inc (NASDAQ:MNOV) has made an offer for AVGN that represents a clever way for AVGN’s stockholders to receive cash equivalent to that which they would receive in a liquidation (less $7M to be paid to MNOV) with the possibility for “an extraordinary, uncapped return” if MNOV is successful post-merger. We estimate AVGN’s cash at around $1.22 per share (BVF estimates $1.20 per share), which is a little less than 40% higher than AVGN’s $0.92 close yesterday.

BVF’s press release reads as follows:

BVF Acquisition LLC (the “Purchaser”), a wholly owned subsidiary of Biotechnology Value Fund, L.P. (“BVF”), announced today that it has commenced a cash tender offer to purchase any and all of the outstanding common stock of Avigen, Inc. (NasdaqGM: AVGN) (“Avigen”) that BVF does not own at a price of $1.00 per share under the conditions described below. The offer price represents a 35% premium over Avigen’s closing stock price of $0.74 on January 8, 2009, the day prior to BVF’s announcement that it was seeking to remove all incumbent Avigen directors and to elect its own slate of stockholder focused nominees (the “BVF Nominees”). BVF Partners L.P., the general partner of BVF, beneficially owns an aggregate of 8,819,600 shares of Avigen, or approximately 29.63% of the outstanding shares.

The offer is currently scheduled to expire at 12:00 midnight, New York City time, on February 23, 2009, unless the offer is extended.

On January 9, 2009, BVF delivered a notice to Avigen to call a special meeting of stockholders to remove all incumbent directors and elect the BVF Nominees, among other things. As described below, a condition to this tender offer is the BVF Nominees being elected to Avigen’s Board of Directors at this special meeting of stockholders, or otherwise appointed, and constituting a majority of the directors on the Avigen board. If elected, the BVF Nominees, subject to their fiduciary duties, intend to pursue negotiations with MediciNova, Inc., related to a proposed merger with Avigen, and work to consummate the proposed merger expeditiously. Assuming the conditions to this Offer are satisfied, stockholders of Avigen would have the choice of (i) tendering their shares and receiving a fixed cash payment upon the closing of this tender offer at a premium to the market price on the day prior to both the announcement of this tender offer and the announcement that BVF was seeking to remove all incumbent Avigen directors and to elect the BVF Nominees, or (ii) maintaining their investment in Avigen and participating in the proposed merger with MediciNova, Inc., if it occurs.

The tender offer is conditioned upon, among other things, (i) the BVF Nominees being elected to Avigen’s board of directors at a special meeting of stockholders called for that purpose, or otherwise appointed, and constituting a majority of directors on Avigen’s board, (ii) the Avigen board redeeming the poison pill rights issued and outstanding under Avigen’s Poison Pill Rights Plan, or the Purchaser being satisfied in its reasonable discretion that the Poison Pill Rights are otherwise inapplicable to this tender offer, the Purchaser or any affiliate or associate of the Purchaser and (iii) Avigen not having authorized, recommended, proposed, announced its intent to enter into or entered into an agreement with respect to or effected any merger, consolidation, liquidation, dissolution, business combination, acquisition of assets, disposition of assets, alternative strategy or relinquishment of any material contract or other right of Avigen or any comparable event or capital depleting transaction not in the ordinary course of business. The tender offer is not subject to any financing condition.

The text of the offer to purchase is attached here.

[Full Disclosure: We have a holding in AVGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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Warren Buffett took the opportunity Friday to lend his considerable intellectual weight to the debate about buy backs, saying, “I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity.”

We’ve been banging the drum for buy backs quite a bit recently. We wrote on Friday that they represent the lowest risk investment for any company with undervalued stock and we’ve written on a number of other occasions about their positive effect on per share value in companies with undervalued stock.

In a Nightly Business Report interview with Susie Gharib, Buffett discussed his view on stock buy backs:

Susie Gharib: What about Berkshire Hathaway stock? Were you surprised that it took such a hit last year, given that Berkshire shareholders are such buy and hold investors?

Warren Buffett: Well most of them are. But in the end our price is figured relative to everything else so the whole stock market goes down 50 percent we ought to go down a lot because you can buy other things cheaper. I’ve had three times in my lifetime since I took over Berkshire when Berkshire stock’s gone down 50 percent. In 1974 it went from $90 to $40. Did I feel badly? No, I loved it! I bought more stock. So I don’t judge how Berkshire is doing by its market price, I judge it by how our businesses are doing.

SG: Is there a price at which you would buy back shares of Berkshire? $85,000? $80,000?

WB: I wouldn’t name a number. If I ever name a number I’ll name it publicly. I mean if we ever get to the point where we’re contemplating doing it, I would make a public announcement.

SG: But would you ever be interested in buying back shares?

WB: I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity. That used to be the way people bought back stocks, but in recent years, companies have bought back stocks at high prices. They’ve done it because they like supporting the stock…

SG: What are your feelings with Berkshire. The stock is down a lot. It was up to $147,000 last year. Would you ever be opposed to buying back stock?

WB: I’m not opposed to buying back stock.

You can see the interview with Buffett here (via New York Times’ Dealbook article Buffett Hints at Buyback of Berkshire Shares)

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