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Archive for January, 2009

Wesley Gray’s Empirical Search Strategies

Posted in About, Liquidation Value, Net Cash Stocks, Net Net Stocks, Stocks, tagged , on January 30, 2009| Leave a Comment »

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, superinvestor

Posted in About, Greenbackd, Liquidation Value, Warren Buffett, tagged , , on January 29, 2009| 5 Comments »

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)

Posted in Activist Investors, ARC Wireless Solutions (NASDAQ:ARCW), Brean Murray Carret, Stocks, tagged , , , , , on January 28, 2009| 3 Comments »

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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AVGN to review BVF’s tender offer

Posted in Activist Investors, Avigen (NASDAQ:AVGN), Biotechnology Value Fund, Net Cash Stocks, Stocks, tagged , , , on January 28, 2009| 1 Comment »

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)

Posted in Greenbackd Portfolio, Ikanos Communications Inc (NASDAQ:IKAN), Net Cash Stocks, Net Net Stocks, Stocks, tagged , , , , , on January 27, 2009| 2 Comments »

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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BVF commences tender offer for AVGN

Posted in Activist Investors, Avigen (NASDAQ:AVGN), Biotechnology Value Fund, Net Cash Stocks, Net Net Stocks, Stocks, tagged , , , on January 26, 2009| Leave a Comment »

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 on stock buy backs

Posted in About, Share buy-backs, Warren Buffett, tagged , on January 26, 2009| Leave a Comment »

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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Irrational buy back behavior

Posted in About, Catalysts, Share buy-backs, tagged on January 23, 2009| 5 Comments »

We’re often banging on about stock buy backs to anyone who’ll listen. We like them because they represent the lowest risk investment for any company with undervalued stock. The S&P500 peaked at 1,576.09 on October 11, 2007. It’s now off a lazy 47% to 827.50. It’s probably fair to say that the average stock is better value now than it was before the financial crisis began (Note: We are not saying that we think the average stock is good value, just that it’s better value than it was 15 months ago). One might think that this relatively better value would result in a surge in buy back activity. One would be wrong (click to enlarge):

buy-backs

(Source: Bloomberg via Market Folly).

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Catalyst wanted: MEMSIC INC (NASDAQ:MEMS)

Posted in About, Net Cash Stocks, Net Net Stocks, Share buy-backs, tagged , , on January 22, 2009| 2 Comments »

MEMSIC INC (NASDAQ:MEMS) is a deeply undervalued net net stock and the second installment in our Catalyst Wanted series. At its $1.64 close yesterday, MEMS has a market capitalization of $39M. We estimate its liquidating value to be around 86% higher at $72M or $3.05 per share. Its liquidating value is predominantly cash, so much so that MEMS has net cash of around $62M or $2.60 per share, which is around 60% higher than its stock price.

About MEMS

MEMS provides semiconductor sensors based on micro electro-mechanical systems. Its accelerometers are used to measure tilt, shock, vibration and acceleration in a range of mobile phones, automotive safety systems and video projectors. The company’s investor relations website can be found here.

The value proposition

Like TRID yesterday, MEMS has an veritable treasure trove on its balance sheet (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):

mems-summary

According to its most recent 10Q, MEMS’ cash and equivalents are invested in money market funds and auction rate securities. As of September 30, 2008, MEMS’ investments included $5.8 million of auction rate securities. Auction rate securities are generally long-term fixed income instruments that provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals, typically every 7, 28, 35 or 49 days. These investments have high credit quality ratings of at least AAA/Aaa. Due to recent liquidity issues, certain of the auction rate securities MEMS holds have failed at auction, meaning that the amount of securities submitted for sale at auction exceeded the amount of purchase orders. If an auction fails, the issuer becomes obligated to pay interest at penalty rates, and all of the auction rate securities MEMS holds continue to pay interest in accordance with their stated terms. However, the failed auctions create uncertainty as to the liquidity in the near term of these securities. As a result, MEMS has classified the $5.8 million of auction rate securities it held at September 30, 2008 as long-term investments. We have applied an 80% discount to those securities.

MEMS not have any off-balance sheet financing arrangements other than property and equipment operating leases, the value of which is not disclosed in the financial statements. It does not have any transactions, arrangements or other relationships with any special purpose entities established for its benefit.

The catalyst?

None. MEMS is using the cash on its balance sheet to construction a facility in Wuxi China. The company expects to complerte the first phase in the first quarter of 2009 at a total cost of $6M. The company expects to complete the second phase within three years at a total cost of $30M. Other significant cash outlays primarily consist of salaries, wages and commissions.

The construction of the Wuxi facility, and in particular the second phase of the Wuxi facility, seems to us to be an investment that carries significant risk in the present environment. We’d suggest that a better use for the cash at this time would be to buy back the company’s stock given the huge discount to its cash backing. If the company was to redirect the $30M to stock repurchases at the present stock price, we estimate that the company’s value would increase more than 150%. It might not be realistic to complete the buy-back at this level. If we were to assume a more realistic number, say $2.50, which is 50% higher than the current stock price but still at a discount to its per share cash backing, the balance sheet looks like this:

mems-summary-post-buy-back2

If the $30M buy-back is completed at $2.50, the liquidating value of the company increases around 20% from $3.05 to $3.60. If we assume that the stock price trades up to the new liquidating value as a result of the company’s new shareholder-oriented management, investors buying in at the present $1.64 stock price see the stock appreciate 120%.

Conclusion

Without a positive catalyst, MEMS will probably remain as a net cash stock for a long time. Despite its deep discount to its cash backing, MEMS is no real bargain without more shareholder-oriented management. This is another stock we’ll keep on our watchlist and let you know if anyone takes it on.

MEMS closed yesterday at $1.64.

The S&P500 Index closed yesterday at 840.24.

[Full Disclosure:  We do not have a holding in MEMS. 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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Catalyst wanted: Trident Microsystems Inc (NASDAQ:TRID)

Posted in Trident Microsystems Inc (NASDAQ:TRID), tagged , on January 21, 2009| 1 Comment »

Trident Microsystems Inc (NASDAQ:TRID) is an undervalued net cash stock looking for a catalyst. We think it’s a good candidate for an activist campaign for a number of reasons:

  1. It’s large for a net cash stock: As its $1.67 close yesterday, the company has a market capitalization of $103M. That puts it into the strike zone for funds with around $100M under management.
  2. It’s deeply undervalued: We estimate its liquidation value is around $170M or $2.75 per share, which is 65% higher than its close yesterday.
  3. Its value is predominantly cash: TRID is trading at two-thirds of its net cash value of approximately $155M or $2.50 per share.
  4. Its stock is liquid enough: According to TRID’s Google Finance page, the average volume for the stock is more than 500,000 shares per day. It traded more than 350,000 yesterday. With 62M shares on issue, an investor seeking ~5% of TRID needs a few more than 3M shares, which should be readily achievable in a reasonably short period of time.

About TRID

TRID develops and markets integrated circuits for digital televisions, LCD televisions and digital set-top boxes. The company’s investor relations page is here.

The value proposition

TRID has an embarrassment of riches on its balance sheet (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):

trid-summaryThere are no off-balance sheet arrangements and its contractual obligations are only $15M, including $2.7M in operating leases and $12.3M in purchase obligations.

TRID’s most recent 10Q makes for interesting reading:

Shareholder Derivative Litigation

Trident has been named as a nominal defendant in several purported shareholder derivative lawsuits concerning the granting of stock options. The federal court cases have been consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. A case also has been filed in State court, Limke v. Lin et al., No. 1:07-CV-080390. Plaintiffs in all cases allege that certain of the Company’s current or former officers and directors caused it to grant options at less than fair market value, contrary to its public statements (including its financial statements); and that as a result those officers and directors are liable to the Company. No particular amount of damages has been alleged, and by the nature of the lawsuit no damages will be alleged against the Company. The Board of Directors has appointed a Special Litigation Committee (“SLC”) composed solely of independent directors to review and manage any claims that the Company may have relating to the stock option grant practices investigated by the Special Committee. The scope of the SLC’s authority includes the claims asserted in the derivative actions. In federal court, Trident has moved to stay the case pending the assessment by the SLC that was formed to consider nominal plaintiffs’ claims. In State court, Trident moved to stay the case in deference to the federal lawsuit, and the parties have agreed, with the Court’s approval, to take that motion off of the Court’s calendar to await the assessment of the SLC. The Company cannot predict whether these actions are likely to result in any material recovery by or expense to, Trident. The Company expects to continue to incur legal fees in responding to these lawsuits, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations.

Regulatory Actions

The Department of Justice (“DOJ”) is currently conducting an investigation of the Company in connection with its investigation into its stock option grant practices and related issues, and the Company is subject to a subpoena from the DOJ. The Company is also subject to a formal investigation by the SEC on the same issues. The Company has been cooperating with, and continues to cooperate with, inquiries from the SEC and DOJ investigations. In addition, the Company has received an inquiry from the Internal Revenue Service to which it has responded. The Company is unable to predict what consequences, if any, that any investigation by any regulatory agency may have on it. Any regulatory investigation could result in substantial legal and accounting expenses, divert management’s attention from other business concerns and harm the Company’s business. If a regulatory agency were to commence civil or criminal action against the Company, it is possible that the Company could be required to pay significant penalties and/or fines and could become subject to administrative or court orders, and could result in civil or criminal sanctions against certain of its former officers, directors and/or employees and might result in such sanctions against the Company and/or its current officers, directors and/or employees. Any regulatory action could result in the filing of additional restatements of the Company’s prior financial statements or require that the Company take other actions. If the Company is subject to an adverse finding resulting from the SEC and DOJ investigations, it could be required to pay damages or penalties or have other remedies imposed upon it. The period of time necessary to resolve the investigation by the DOJ and the investigation from the SEC is uncertain, and these matters could require significant management and financial resources which could otherwise be devoted to the operation of its business. In addition, the Company’s 401(k) plan and its administration were audited by the Department of Labor but no further action was noted.

The catalyst?

None. There are no activist investors in this stock and management seems intent on helping itself to large portions of options and restricted stock. Rather than pay dividends to long-suffering stockholders, they’ll retain the earnings in the faint hope it’ll pump up the stock price, which helps with their options. The company could comfortably pay a special dividend of around $3 per share and still leave $43M of cash in the bank.

Conclusion

TRID is another perennial inclusion on the lists of net net stocks. Even though it’s deeply undervalued, without a catalyst it seems destined to remain that way. We’ll keep an eye on its filings and let you know if anyone takes it on.

TRID closed yesterday at $1.67.

The S&P500 Index closed yesterday at 805.22.

[Full Disclosure:  We do not have a holding in TRID. 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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