Posted in About, Activist Investors, Catalysts, Greenbackd, Value Investment, tagged Activist investment, Corporate Governance, Greenbackd on September 18, 2009| Leave a Comment »
We’ll be in San Diego next week for the Hedge Fund Activism and Shareholder Value Summit. If you’re going too, and you’d like to catch up, we’d love to hear from you. You can reach us at greenbackd [at] gmail [dot] com.
We’ll be posting intermittently next week, but we’ll be back to our regular schedule starting from Monday, 28 September. Hopefully we’ll have some new insights to share.
Posted in Biotechnology Value Fund, Net Cash Stocks, OrthoLogic Corporation (NASDAQ:CAPS), Stocks, tagged Net Cash Stock, OrthoLogic Corporation (NASDAQ:CAPS) on September 17, 2009| Leave a Comment »
We’ve decided to exit our position in OrthoLogic Corporation (NASDAQ:CAPS) at its $0.90 close yesterday. We opened the position at $0.60, so we’re up 50% on an absolute basis. The S&P500 Index closed at 752.83 on February 27, the day we opened the position, and closed yesterday at 1,068.76, which means we’re up 8.0% on relative basis.
Post Mortem
We started following CAPS (see our post archive here) because it was trading below its net cash value and Biotechnology Value Fund (BVF) had a 13.42% holding. It was an unusual holding for us because BVF’s holding is passive. Further, CAPS is a development stage company spending its cash on the development and commercialization of two product platforms: AZX100 and Chrysalin® (TP508). Ordinarily, we wouldn’t have entered a position like this, but we did so because we’d had some success in the past with BVF, particularly with our AVGN position. As BVF’s holding in CAPS is passive, BVF seems to be betting on the return from the product platforms and doesn’t view it as a liquidation play. We have no insight into the value of those product platform assets, so our holding in CAPS is purely on its cash value. As the share price is now near the reduced net cash value, we’ve decided to exit. CAPS might still be a boomer for BVF, but we can’t assess the risks properly, so we’re out.
[Full Disclosure: We do not have a holding in CAPS. 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.]
Posted in Activist Investors, Ditech Networks Inc (NASDAQ:DITC), Lamassu Holdings LLC, Stocks, tagged Activist investment, Ditech Networks Inc (NASDAQ:DITC), Liquidating Value, Net Cash Stock on September 14, 2009| Leave a Comment »
The board of Ditech Networks Inc (NASDAQ:DITC) has agreed to nominate Lamassu Holdings’ representatives, Alan B. Howe and Frank J. Sansone, to be elected to the board at DITC’s next annual meeting. It seems that the board’s concern in nominating Howe and Sansone was that they not participate in any “withhold the vote” campaign or disparage the board. It’s a big win for Lamassu, and it appears their letter writing campaign was successful. The stock is now trading at a premium to our estimate of its liquidation value, which value is continuing to deteriorate, so we’re exiting the position. The stock is up from our initial $0.89 to close Friday at $1.75,which is an absolute return of 96.6%. The S&P500 closed at 788.42 when we opened the position, and closed Friday at 1,0472.73, which means our outperformance over the S$P500 was 64.4%.
Post Mortem
We started following DITC (see our archive here) because it was trading below its net cash value with an investor, Lamassu Holdings LLC, disclosing a 9.4% holding in November last year. Lamassu had previously offered to acquire DITC for $1.25 per share in cash. At that time, Lamassu said that it “[anticipated] its due diligence requirement [would] take no more than two weeks and there [was] no financing contingency.” Lamassu then nominated two candidates for election to the board “who [were] committed to enhancing shareholder value through a review of the Company’s business and strategic direction.” Lloyd I Miller III subsequently disclosed a 5.9% holding. Miller came out in support of the director candidates nominated by Lamassu as “candidates who [were] independent of management.” Miller said he sought “to encourage greater attention to corporate governance by all members of the Board of Directors.”
Lamassu then initiated a pointed letter campaign aimed at DITC’s board. In the first letter, Lamassu accused DITC management of “spending as though Ditech Networks has money to burn, adding to the amount of money you have already lost for shareholders during your tenure,” “aggressively [overstepping] the bounds of good corporate governance” and “clearly [violating] your fiduciary responsibility.” In the second, Lamassu claimed that the “decisions of this board [had] shown a pattern of director entrenchment characterized by prioritizing the interest of its members in the face of poor results at the expense of the shareholders” and called for shareholders to “receive ample representation on the board.” The campaign was succesful, and DITC agreeing to nominate Lamassu Holdings’ representatives for election to the board. The stock is up from our initial $0.89 to close Friday at $1.75, which gives the company a market capitalization of $46M. We last estimated the net cash value at around $32.2M or $1.23 per share and the liquidation value at around $43.4M or $1.65 per share. With the stock at a premium to the liquidation value, and that liquidation value deteriorating, we’ve decided to exit the position for a 96.6% gain.
The proxy statement for DITC’s 2009 annual meeting of stockholders more fully describes the agreement between Lamassu and DITC thus:
The Board of Directors currently has seven members. There are two directors in the class whose term of office expires in 2009. Both of the directors currently in serving in this term will not be standing for re-election. The Board of Directors has nominated two new persons to fill these positions. The two nominees, Mr. Alan B. Howe and Mr. Frank J. Sansone, are not currently directors of Ditech. The nomination of each of Mr. Howe and Mr. Sansone was recommended by a securityholder. If elected at the annual meeting, each of the nominees would serve until the 2012 annual meeting and until his successor is elected and has qualified, or until the director’s death, resignation or removal.
On September 2, 2009, Ditech and Lamassu Holdings L.L.C. and certain of its affiliates (collectively, “Lamassu”), entered into a letter agreement in which Ditech and Lamassu agreed that each of Mr. Howe and Mr. Sansone would be nominated to be elected to the Board of Directors at this annual meeting. In addition to the nomination of each of Mr. Howe and Mr. Sansone for election to the Board of Directors, the letter agreement also provides that:
• If Mr. Sansone is unable to serve as a director at a time when Lamassu owns at least 5% of the Ditech common stock, Ditech will appoint a replacement director designated by Lamassu and reasonably acceptable to Ditech Networks;
• Mr. Sansone and any replacement director will sign a conditional resignation from the Board of Directors, which may be accepted by the Board of Directors in the event that Lamassu’s beneficial ownership of Ditech common stock falls below 5% of the outstanding Ditech common stock;
• Lamassu will vote all of the shares it beneficially owns in support of the slate of directors nominated by the Board of Directors at this annual meeting of stockholders (and will not support or participate in any “withhold the vote” or similar campaign, or support any other nominees other than the slate of directors nominated by the Board of Directors);
• Lamassu withdrew its previously announced notice of its intent to nominate directors with respect to this annual meeting of stockholders;
• For a period ending 90 days from the date of this annual meeting of stockholders, Lamassu will not (i) make any public statement regarding Ditech, the Board of Directors or any of Ditech’s officers, directors or employees, except for the press release attached to the agreement or as may be required by law, or (ii) disparage Ditech, the Board of Directors, or any of Ditech’s officers, directors or employees, in any manner, including in any manner which could be harmful to Ditech or its business, the Board of Directors or its reputation, or the business reputation or personal reputation of any officer, director or employee of Ditech.
[Full Disclosure: We do not have a holding in DITC. 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.]
Posted in About, Activist Investors, Stocks, tagged Activist investment on September 11, 2009| Leave a Comment »
ClusterStock has an article by John Carney, How Ignorant Are Shareholders?, in which he argues that the financial crisis has “dealt a serious blow” to the “idea that corporate governance reforms that empower shareholders to direct the activities of corporations would make companies more financially responsible.” We think John’s got it wrong, but before we begin our rant, let us just say that there is much to respect about John Carney. According to his bio, he’s got a law degree from the University of Pennsylvania, and he practiced corporate law at Skadden, Arps, Slate, Meagher & Flom and Latham & Watkins, both of which are preeminent firms. We also almost wholly agree with his positions on plenty of contentious issues, as summarized here in his bio:
He has argued that failed banks should not be bailed out, Lehman’s collapse was not a disaster, AIG should be declared bankrupt, that naked short selling is not a problem, that backdating isn’t so bad, insider trading should be legal, many corporate CEOs are underpaid, global solutions are worse than local solutions, Warren Buffett is overrated, Michael Milken is a great American, the collapse of the hedge fund was not a scandal, hedge funds are over-regulated, education is overrated by the educated, bonuses at successful Wall Street’s firms are deserved and possibly undersized, management buyouts are boons to the economy, Enron’s management was victimized by an over-zealous prosecution, Sarbanes-Oxley should be repealed, corporate compliance culture is a disaster, shareholder democracy is overrated, hostile takeovers ought to be revived, the market is permanently moving away from public ownership of equity in corporations, private partnerships are on the rise, public ignorance is encouraged and manipulated by governments and corporations, experts overrate expertise, regulatory agencies are controlled by the businesses they supposedly regulate and Wall Street is much more fun than people give it credit for.
He’s trained in the dark arts of the law and he’s practiced with the best. In other words, he should know better.
John’s premise is that financial companies that score highest on most measures of corporate governance performed poorly during the crisis. He argues that shareholders are ignorant, and giving them more say in the management of a company is like tossing the car keys to a blind man and jumping in the back seat:
In political science, the roles of irrationality and public ignorance are well understood. Studies going back decades prove that the public is not only ignorant, it is stubbornly ignorant. It remains ignorant even in the face of widely available and easily obtainable information. Voters are so ignorant that they cannot rationally choose between different programs offered by politicians. And the ignorance persists so that they cannot assign blame or credit to the parties responsible for the programs that are ignorantly selected.
If economists were to take this seriously and apply it to shareholder behavior, they might discover that the case for shareholder democracy is seriously undermined. Instead, many continue to doubt that shareholder ignorance is a serious problem. And those who acknowledge it could be a problem, often assume it can be overcome by providing shareholders with more information. This simply ignores what we’ve learned in political science about shareholder ignorance.
Now, we don’t disagree that many shareholders are ignorant. It’s well known that many don’t read disclosure documents, and many can’t read financial statements. We’ve also argued previously that even those who do read financial statements often ignore important parts of those financial statements, like the balance sheet. Our own About Greenbackd page argues that there are opportunities for investors focused on the balance sheet, because many investors are mesmerized by earnings and totally ignore assets. Where earnings understate the asset value, this creates an opportunity for investors like us. No, we don’t disagree that many shareholders are ignorant. In fact, we rely on that ignorance to make our living.
The point at which we diverge from John is his contention that this ignorance precludes a shareholder from voting. We don’t allow shareholders to vote because that is the best way to manage a company. Shareholders vote because it is their right to do so. A share is nothing more than a bundle of rights: A right to a dividend, a right to a share of the assets on a winding up, a right to a say in the affairs of the company on certain issues, a right to determine who directs the affairs of the company. They are property rights, and standing is accorded to the holder to enforce those rights. The board, and, indirectly, the officers of the corporation, serve at the pleasure of the shareholders. Often a board will seek to prevent a shareholder attempting to demonstrate this last point, for example, by implementing poison pills and other shareholder unfriendly devices, but that is nothing more than an implicit recognition by the board that it is true. Voting, then, is simply a shareholder exercising one of their property rights. If you advance your money, we think you should get all of the attendant property rights, whether you’re ignorant or not. In this society, for good or ill, the owner of property is the person who controls its destiny. We’d argue that this is generally a good thing, and almost all progress the world over stems from this simple principle. Any attempt to sever the relationship between private property and ownership strikes right at the heart of capitalism.
So why the seeming relationship between “good corporation governance” and poor returns? Who knows, really? Statistics can be massaged to say anything. If we had to guess, without reading the paper, we’d guess that it’s a problem of definition. The phrase “good corporate governance” is at best meaningless, and at worst a smoke screen to obfuscate what it really is: an attempt by management to operate on behalf of “stakeholders” (read “parties other than shareholders”), to adhere to the “triple bottom line,” “The Equator Principles,” and other similar ideas irrelevant to shareholders. It’s no wonder that the corporation performs poorly. The board’s worried about everyone other than the owners. We’d argue that those are not proper considerations for the board. What sensible suggestions fall within the remit of “good corporate governance” are necessary only because shareholders don’t have sufficient voice in the operation of the company. They are simply unnecessary, additional regulation to paper over holes left because shareheolders are disenfranchised.
What’s the alternative? Plato’s Republic shoehorned into the corporations law? Philosopher-king CEOs? Frankly, the thought makes us gag. No, the real alternative is shareholder enfranchisement. Force the stewards of capital – the boards and officers – to recognize the rights of shareholders – the rightful owners of that capital. Ensure that shareholders are properly able to deal with their property as they see fit, and to express their desires for that property to the board without restriction. Carl Icahn has prepared a good starting point in a series of essays, Capitalism Should Return to Its Roots, We’re Not the Boss of A.I.G. and It’s Up to the Shareholders, Not the Government, to Demand Change at a Company.
John concludes by calling on economists to “survey shareholders and objectively document ignorance.” There’s no need. They can be as dumb as a box of hammers, but they should still be allowed to cast their vote. If that right is taken away the key foundation of capitalism is lost, and we’re pulling our money out of the market and putting it into shot-gun shells and tinned food.
End rant.
Posted in Activist Investors, Net Cash Stocks, Spencer Capital Management, Stocks, VaxGen Inc (OTC:VXGN), tagged Activist investment, Liquidation Value, Net Cash Stock, VaxGen Inc (OTC:VXGN) on September 10, 2009| 9 Comments »
A group of investors in VaxGen Inc (OTC:VXGN) have formed the “VaxGen Full Value Committee” to conduct a proxy contest to replace the current board of VXGN at the next annual shareholders meeting. The group, comprising BA Value Investors’ Steven N. Bronson and ROI Capital Management’s Mark T. Boyer and Mitchell J. Soboleski, intends to replace the current board with directors who will focus on the following objectives:
1. Returning capital to [VXGN]’s shareholders, including an immediate distribution of $10,000,000 in cash;
2. Terminating [VXGN]’s lease with its landlord, Oyster Point Tech Center, LLC, and settling with the landlord the obligations of [VXGN] on the remaining lease payments;
3. Exploring ways to monetize [VXGN] as a “public shell,” including the utilization of [VXGN]’s Substantial Net Operating Losses; and
4. Protecting for the benefit of shareholders royalty payments receivable from the sale of [VXGN]’s intellectual property.
We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” Management has said that, if the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.
BA Value Investors had previously disclosed an activist holding and, in a June 12 letter to the board, called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”
Another group led by Spencer Capital and styling itself “Value Investors for Change” has also filed preliminary proxy documents to remove the board. In the proxy documents, Value Investors for Change call out VXGN’s board on its “track record of failure and exorbitant cash compensation”:
VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.
VXGN is up 31.3% since we initiated the position. At its $0.63 close yesterday, it has a market capitalization of $20.9M. We last estimated the company’s liquidation value to be around $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. The authors of a letter sent to the board on July 14 of this year adjudge VXGN’s liquidation value to be significantly higher at $2.12 per share:
Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.
The entry of the VaxGen Full Value Committee into the proxy contest will certainly make the next meeting an interesting spectacle, and, with any luck, we will see a liquidation of VXGN soon, either at the hands of the present board, by Value Investors for Change or the VaxGen Full Value Committee.
The Purpose of Transaction portion of the amended 13D filing is set out below:
The Reporting Persons acquired the shares of Common Stock to which this statement relates for investment purposes.
On June 12, 2009, Mr. Bronson, on behalf of BA Value Investors, LLC, sent a letter to the Board of Directors of the Issuer. In the letter, Mr. Bronson stated that the Company must act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses. A copy of the letter to the Issuer has been filed as Exhibit 1 to the Statement.
On August 21, 2009, the Reporting Persons formed a committee called the “VaxGen Full Value Committee.” The VaxGen Full Value Committee intends to conduct a proxy contest to replace the current Board of Directors at the next annual shareholders meeting with directors who will focus on the following objectives:
1. Returning capital to the Issuer’s shareholders, including an immediate distribution of $10,000,000 in cash;
2. Terminating the Issuer’s lease with its landlord, Oyster Point Tech Center, LLC, and settling with the landlord the obligations of the Issuer on the remaining lease payments;
3. Exploring ways to monetize the Issuer as a “public shell,” including the utilization of the Issuer’s Substantial Net Operating Losses; and
4. Protecting for the benefit of shareholders royalty payments receivable from the sale of the Issuer’s intellectual property.
[Full Disclosure: We have a holding in VXGN. 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.]
Posted in Activist Investors, Avigen (NASDAQ:AVGN), Biotechnology Value Fund, Net Cash Stocks, Stocks, tagged Activist investment, Avigen Inc (NASDAQ:AVGN), Biotechnology Value Fund, Liquidation Value, Net Cash Stock on August 27, 2009| Leave a Comment »
Although we closed our position in Avigen Inc (NASDAQ:AVGN) earlier this week, we’re keeping a watching brief on the stock. AVGN has now filed with the SEC the terms of the deal with MediciNova Inc (NASDAQ:MNOV), and they’re not as bad as the earlier report seemed to suggest. The deal has, however, attracted the ire of The Pennsylvania Funds, an AVGN shareholder, who has filed a class action lawsuit on behalf of all AVGN stockholders. The stock closed yesterday at $1.28, about $0.01 under our exit price. The terms of deal provide some downside protection and some upside optionality, and so are worth considering in some more detail, although probably not enough of either to persuade us to re-enter the stock. If the lawsuit gains traction and pushes the stock price down, however, AVGN might become attractive again.
About AVGN
We started following AVGN in December last year (see archived posts here) because it was a net cash stock and specialist biotechnology investor Biotechnology Value Fund (BVF) was pushing it to liquidate and return its cash to shareholders. Despite BVF’s failure to remove the board, we continued to maintain our position in AVGN because BVF won a number of important concessions from the board that made AVGN a much more attractive stock than it was when we started following it. We continuted to hold on when AVGN announced that it was back in negotiations with MediciNova, Inc, but closed the position for a 98.5% gain when the initial terms of the deal were announced.
The terms of the deal
The downside protection
Under the terms of the merger agreement AVGN shareholders will have the right to elect to receive an amount currently estimated by AVGN’s board at $1.24 per share in either cash or secured convertible notes to be issued by MNOV. Approximately $1.19 of the consideration will be paid at the closing, and approximately $0.05 will be paid at June 30, 2010. Both payments are subject to certain potential adjustments. The first payment is subject to adjustment based on activities related to the liquidation or sale of certain assets of AVGN in connection with the winding down of its operations prior to closing. The second payment is subject to upward adjustment based on savings in estimated expenses through closing and receipt of certain payments post-closing as well as downward adjustment in the event that closing liabilities exceed estimated liabilities through closing.
The upside optionality
The secured convertible notes will be convertible on the final business day of each month into shares of MNOV common stock at a conversion price of $6.80 per share, which conversion price is based on the volume-weighted average price of MNOV’s common stock as quoted on Nasdaq and the Osaka Securities Exchange over the 20 trading days prior to signing of the merger agreement. The convertible notes will mature on the 18-month anniversary of the closing of the merger, and the indenture governing the notes will include customary events of default and anti-dilution adjustments. Note that the last time MNOV traded above $6.80 was two years ago in August 2007.
The joint press release announcing the terms of the deal is set out below:
MediciNova and Avigen Enter Into Definitive Agreement for Business Combination
SAN DIEGO, Calif., and ALAMEDA, Calif., August 21, 2009 — MediciNova, Inc., a biopharmaceutical company that is publicly traded on the Nasdaq Global Market (Nasdaq:MNOV) and the Hercules Market of the Osaka Securities Exchange (Code Number:4875) and Avigen, Inc. (Nasdaq:AVGN), a biopharmaceutical company, today announced that they have entered into a definitive merger agreement pursuant to which MediciNova’s wholly-owned subsidiary will merge with and into Avigen. Completion of the transaction will permit the combination of the companies’ broad neurological clinical development programs based on ibudilast (Avigen’s AV-411 and MediciNova’s MN-166).
Under the terms of the merger agreement, which has been approved by both companies’ boards of directors, Avigen shareholders will have the right to elect to receive an amount currently estimated at approximately $1.24 per share in either cash or secured convertible notes to be issued by MediciNova. Approximately $1.19 of this consideration will be paid at the closing, and approximately $0.05 will be paid at June 30, 2010. As set forth in the merger agreement, both payments are subject to certain potential adjustments. The first payment is subject to adjustment based on activities related to the liquidation or sale of certain assets of Avigen in connection with the winding down of its operations prior to closing. The second payment is subject to upward adjustment based on savings in estimated expenses through closing and receipt of certain payments post-closing as well as downward adjustment in the event that closing liabilities exceed estimated liabilities through closing.
The secured convertible notes will be convertible on the final business day of each month into shares of MediciNova common stock at a conversion price of $6.80 per share, which conversion price is based on the volume-weighted average price of MediciNova’s common stock as quoted on Nasdaq and the Osaka Securities Exchange over the 20 trading days prior to signing of the merger agreement. The convertible notes will mature on the 18-month anniversary of the closing of the merger, and the indenture governing the notes will include customary events of default and anti-dilution adjustments.
In addition, Avigen’s stockholders will be entitled to one Contingent Payment Right (“CPR”) that will entitle holders under certain circumstances to a pro rata portion of one or more of the following: (1) in the event the first milestone payment of $6.0 million, or approximately $0.20 per share, under Avigen’s 2005 assignment agreement with Genzyme Corporation (“Genzyme Agreement”) is achieved in the 20 months following closing, a cash payment of the proceeds (to the extent such cash is received by MediciNova in the 20 months following closing); (2) in the event the Parkinson’s product reverts to MediciNova under the Genzyme Agreement and is subsequently sold, licensed or otherwise transferred, 50% of the proceeds received in cash in the 20 months following closing; and (3) the amount of money remaining in the plan trust established under Avigen’s management transition plan following termination of such trust. In each case, the payments will be net of any related out-of-pocket costs, damages, fines, penalties and expenses incurred by MediciNova. The CPRs will not be transferable except in limited circumstances.
Yuichi Iwaki, M.D., Ph.D., MediciNova’s President and Chief Executive Officer, said, “We are excited about combining Avigen with MediciNova and believe that it presents a unique opportunity for shareholders of both companies, most notably, the ability to more fully take advantage of the opportunities that the ibudilast compound and analogs provide in a variety of indications and markets.”
“We believe the transaction reduces many of the uncertainties involved with dissolution and is in the best interests of our shareholders,” commented Andrew Sauter, Avigen’s Chief Executive Officer, President and Chief Financial Officer. “In addition, we believe that combining the two companies’ ibudilast programs will enhance the global development potential for the compound that could benefit patients with a range of neurological indications.”
The transaction is expected to close in the fourth quarter of 2009 and is subject to approval of Avigen’s stockholders and approval of MediciNova’s stockholders as well as other customary closing conditions. In addition, the closing is conditioned on the receipt of certain releases from Avigen’s directors (other than John K.A. Prendergast), Kenneth Chahine, Kirk Johnson and Andrew A. Sauter.
RBC Capital Markets Corporation is acting as financial advisor to Avigen and Cooley Godward Kronish LLP is serving as its legal counsel. Ladenburg Thalmann & Co. Inc. (NYSE Amex: LTS) is acting as financial advisor to MediciNova, Euclidean Life Science Advisors is acting as its business advisor and Dechert LLP is serving as its legal counsel.
The AVGN press release disclosing the law suit is set out below:
On August 25, 2009, The Pennsylvania Funds filed a class action lawsuit in the Superior Court of the State of California, County of Alameda, purportedly on behalf of the stockholders of Avigen, Inc., against Avigen and its directors, alleging that Avigen’s directors breached their fiduciary duties to the stockholders of Avigen in connection with the proposed acquisition of Avigen by MediciNova, Inc. The complaint seeks to enjoin the defendants from completing the acquisition as currently contemplated.
Avigen and its directors intend to take all appropriate actions to defend the suit.
It is possible that additional similar complaints may be filed in the future. If this does occur, Avigen does not intend to announce the filing of any similar complaints unless they contain allegations that are substantially distinct from those made in the pending action.
Conclusion
With the terms of the deal announced by AVGN, we’re still happy to be out of the stock. The downside protection is subject to various adjustments, and the upside is wholly dependent on the performance of MNOV’s stock over $6.80, which is higher than the stock has traded since 2007. That said, it’s worth watching to the see the effect of the class action on the stock price, because there is a price at which the stock again becomes attractive.
Hat tip GR.
[Full Disclosure: We do not 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. Do your own research before investing in any security.]
Posted in Activist Investors, MRV Communications Inc (OTC:MRVC), Special Situation, Stocks, Value Investors for Change, tagged Activist investment, Liquidation Value, MRV Communications Inc (OTC:MRVC), Net Current Asset Value, Special Situation on August 25, 2009| 1 Comment »
MRV Communications Inc (OTC:MRVC) is an activist play with Value Investors for Change – who recently filed proxy documents in relation to VXGN – seeking to replace the “current, ineffective board of directors” with a new board of “highly qualified, independent directors committed to realizing for all MRVC stockholders the fullest potential of their investments.” Value Investors for Change detail a litany of problems with this stock in the preliminary proxy filing, which range from a simple failure to file financial statements or hold an annual meeting to the mishandling of an acquisition and an options dating scandal. What’s the attraction to the stock? Two things:
1. As at the last filing date, for the period ended March 31, 2008, MRVC’s (unaudited) NCAV was around $113.9M or $0.72 per share, which is yesterday’s closing price. Note that the liquidation value is likely negligible and the financial statements are more than a year out of date (which makes any valuation problematic). One positive is the revenue: the company has annualized revenue of around $500M. A small improvement in margins could result in a big improvement in earnings.
2. Value Investors for Change believes the company has a “valuable franchise and a strong market position” and we like their approach, described in the preliminary proxy documents thus:
The participants in this solicitation (collectively, “Value Investors for Change”) are investors who seek to encourage companies to create, preserve and enhance long-term value for their stockholders, the true owners of America’s public companies. We have developed a sophisticated screening process that we use to identify public companies that we believe (i) are undervalued, (ii) are not adequately serving the interests of their stockholders and (iii) require a new board of directors, so that, with the encouragement of stockholders such as you, we can begin implementing reforms ourselves with the goal of increasing stockholder value.
We’re adding MRVC to our Special Situations portfolio at its $0.72 close yesterday.
About MRVC
From the last 10Q:
MRV Communications is a supplier of communications equipment and services to carriers, governments and enterprise customers, worldwide. We are also a supplier of optical components, primarily through our wholly owned subsidiaries: Source Photonics and Fiberxon. We conduct our business along three principal segments: (1) the network equipment group, (2) the network integration group and (3) the optical components group. Our network equipment group provides communications equipment that facilitates access, transport, aggregation and management of voice, data and video traffic in networks, data centers and laboratories used by telecommunications service providers, cable operators, enterprise customers and governments worldwide. Our network integration group operates primarily in Italy, France, Switzerland and Scandinavia, servicing Tier One carriers, regional carriers, large enterprises, and government institutions. We provide network system design, integration and distribution services that include products manufactured by third-party vendors, as well as products developed and manufactured by the network equipment group. Our optical components group designs, manufactures and sells optical communications products used in telecommunications systems and data communications networks. These products include passive optical network, or PON, subsystems, optical transceivers used in enterprise, access and metropolitan applications as well as other optical components, modules and subsystems. We market and sell our products worldwide, through a variety of channels, which include a dedicated direct sales force, manufacturers’ representatives, value-added-resellers, distributors and systems integrators.
In July 2007, we completed our acquisition of Fiberxon, a PRC-based supplier of transceivers for applications in metropolitan networks, access networks and passive optical networks, for approximately $131 million in cash and stock. Fiberxon is part of the Optical Components group, and its results of operations are included in our Consolidated Financial Statements from July 1, 2007.
The value proposition
The main problem with any analysis of MRVC is that the financial statements are more than a year out of date. As at the last filing, MRVC’s NCAV was around $113.9M or $0.72 per share. We believe that the liquidation value is likely neglible. We’ve set out the valuation below in the usual manner (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):
As at the last filing date, the company had quarterly revenue of $125M, which annualizes to around $500M. A small improvement in margins could result in a big improvement in earnings. Value Investors for Change seek to provide that improvement, which they describe in the preliminary proxy documents set out below.
The catalyst
From the preliminary proxy documents:
REASONS FOR THE SOLICITATION
Value Investors for Change believes that the Company has a valuable franchise and a strong market position. However, we believe this value has been masked and the Company’s potential remains unrealized due to the Board’s lack of effective oversight and appropriate corporate governance policies.
Our Nominees will provide new independent voices in the Company’s boardroom and they will seek to start the process of rebuilding stockholder value. Our Nominees are committed to fully implementing and embracing long overdue corporate governance reforms.
We do not believe the current directors serving on the Board are acting in the best interests of stockholders and are concerned that this Board will fail to take the steps we believe are necessary to preserve stockholder value.
Fate of the Company’s remaining cash balance
This Annual Meeting may be the only opportunity for stockholders to determine the fate of MRVC’s substantial remaining cash balance (this amount was $73.7 million as of June 30, 2009, including short-term investments, as per the Company’s press release attached as an exhibit to its Form 8-K filed on July 27, 2009). Actions and statements by the Company indicate that the existing management and Board are prepared to ignore the best interests of the Company’s stockholders. Indeed, their track record of negative operating cash flows over the past several years is reflective of the same. If the incumbent Board and management are not replaced at this Annual Meeting, stockholders may not only lose any hope of determining the fate of MRVC’s remaining cash reserves, but also will likely have their share value further eroded. If elected to the Board, none of our Nominees intend to accept any cash fees from the Company. The Funds’ only interest here is as a stockholder.
Deficient Corporate Governance Procedures; Recent Options Scandal
The Company continues to be embroiled in an options scandal. We believe the Board was in need of change even before the current scandal broke, but the options scandal has served to underscore the need for urgent reform.
According to a press release issued by the Company on June 5, 2008, beginning in the middle of 2006 through early 2007, MRVC conducted an informal review of its share-based award practices and concluded that there was no evidence that grant dates of options were designed to occur on dates with more favorable exercise prices (i.e., on dates with lower market prices). Given subsequent events, it appears though that this review, which lasted over six months, was inadequate and did not discover certain inappropriate practices which had taken place. During this lengthy investigation and after its completion, the Company filed numerous quarterly reports and an annual report on Form 10-K for the fiscal year ended December 31, 2007, certifying to the accuracy of those financial statements. Well after this investigation and after these filings, management then determined that the conclusions reached from the earlier review were incorrect with respect to certain options granted during the period from 2002 through the first quarter of 2004. The Board determined that the financial statements for the periods from 2002 to 2008 and the related reports of MRVC’s independent public accountants, earnings press releases, and similar communications previously issued by MRVC should not be relied upon as a consequence of the pending restatement of its historical financial statements. It has been over a year since the press release announcing this major problem for the Company was issued and yet no restatements of the Company’s financial statements have been filed.
As a result of these actions,
• the Company currently faces an inquiry by the Securities and Exchange Commission (the “Commission”);
• the Company has been unable to file its annual report on Form 10-K for the year ended December 31, 2008;
• the Company has been unable to file its quarterly reports on Form 10-Q for the periods ended June 30, 2008, September 20, 2008, March 31, 2009 and June 30, 2009;
• the Company has received 6 determination letters from NASDAQ informing the Company that it would be subject to delisting as a result of its failure to timely file its financial statements and, on June 17, 2009, NASDAQ suspended the listing of the Company’s common stock from the NASDAQ Stock Market as a result of the Company’s failure to file such financial statements;
• on August 19, 2009, the NASDAQ Stock Market announced that it will delist the Company’s common stock (NASDAQ will file a Form 25 with the Commission to complete the delisting which becomes effective ten days after the Form 25 is filed); and
• the Company faces various lawsuits related to its stock option practices.
These option grants raise serious questions about the Board’s judgment and apparent disregard for the interests of stockholders. Such behavior raises significant doubts about the integrity of the Board.
Mishandling of the Acquisition of Fiberxon
On June 26, 2007, the Company amended an Agreement and Plan of Merger between affiliates of the Company and Fiberxon, Inc. that was initially entered into on January 26, 2007 (the “Merger Agreement”) to, among other things, remove as a condition precedent for the consummation of the merger that Fiberxon, Inc. deliver to MRVC its audited consolidated financial statements prior to the closing of the transaction. This amendment was unanimously approved by MRVC’s Board despite their knowledge that:
• there were allegations of financial and accounting irregularities that called into question the reliability of Fiberxon’s consolidated financial statements for its fiscal years ended December 31, 2004 and 2005 raising serious concerns regarding Fiberxon’s financial and reporting processes;
• in addition to the irregularities, Fiberxon’s independent auditors called into question the commitment of Fiberxon’s management to maintain reliable financial reporting systems, including accounting books and records, in conformity with accounting principles generally accepted in the United States and the People’s Republic of China;
• in the view of Fiberxon’s auditors, these matters also raised doubt on the ability of Fiberxon’s existing management to provide its auditors the written representations required under auditing standards generally accepted in the United States; and
• the suspension by the independent auditors of its audit of Fiberxon’s financial statements in June 2007 would likely have an adverse impact on the Company’s ability to obtain and file Fiberxon’s financial statement within the time allowed by, and in the form and content required by, the Commission’s rules thereby leading to:
• MRVC not being eligible to use the Commission’s short-form registration statement on Form S-3 to register the issuance of its securities; and
• the delisting of the Company’s common stock from the NASDAQ Stock Market and, as a result of the delisting, a default on the Company’s outstanding convertible notes.
Additionally, the Board was aware that if MRVC delayed filing with the Commission certain financial statements relating to the Fiberxon acquisition, as required by the Commission, this would put at risk the Company’s ability to use an effective registration statement to issue securities, thus handcuffing the Company’s ability to raise funds if it became necessary to do so. We believe this lack of regard that the Board showed for the stockholders of the Company highlights the incompetence of the Board and the management of the Company.
Failure to Hold an Annual Meeting
The Annual Meeting is the once-a-year event for all stockholders to voice their views and concerns. Despite the Company’s professed commitment to stockholder democracy and good corporate governance, the Company appears unable to take appropriate actions regarding governance.
On July 20, 2009, Spencer Capital Opportunity Fund, LP filed a lawsuit in Delaware pursuant to Section 211(c) of the Delaware General Corporation Law requesting that the Court of Chancery of the State of Delaware (the “Chancery Court”) order MRVC to hold its 2009 annual meeting of stockholders without delay and to grant other relief deemed appropriate by the Court. Under Delaware law, if a corporation fails to hold an annual meeting of stockholders or take action by written consent to elect directors for a period of 13 months, any stockholder may petition the Chancery Court to order that a meeting be held. MRVC has not held an annual meeting of stockholders since May 29, 2007 and accordingly has not met its obligations under Delaware law.
Pursuant to a Stipulated Order entered into in the Chancery Court dated August 7, 2009 (the “Order”), MRVC will hold its Annual Meeting on or before November 11, 2009. In the event that the Company’s Board or its outside auditor determines that the Company’s restatement of its financial statements is complete such that the Annual Meeting could be held at a date earlier than November 11, 2009, then the Company will hold the Annual Meeting not more than 40 days after this determination.
Damage to Company’s Credibility
It seems clear to us that the crucial issue of the credibility of the Company’s Board and management has been identified both outside and inside the Company. We believe MRVC is at a crossroads. The Company is beset by problems arising out of actions taken by management and overseen by the Board. Moreover, these issues have diverted the Board and management from attending to the successful operation of the business. In the face of these developments, the Company’s stock price meaningfully lags behind its peers. It is up to us, as MRVC’s stockholders, to send a clear and definite message to MRVC’s Board and management that meaningful change is needed. By voting for our Nominees, you will join us in sending that message to the current Board and help put MRVC back on the right course.
Dismal Share Price Performance
Last, but certainly not least, is MRVC’s ever-worsening stock price. Between January 1, 2005 and July 20, 2009, the date on which Spencer Capital Opportunity Fund, LP, filed a complaint requesting that the Chancery Court compel the Company to hold its Annual Meeting, MRVC’s stock price has fallen by 87.2%. We believe this is due to the perception of the investment community that this Board will destroy the Company’s remaining value.
An action plan to rebuild stockholder value is needed, and fast. Value Investors for Change proposes to take the following steps which we believe will return the Company to a positive track and serve the best interests of all of MRVC’s stockholders:
(1) Restore confidence in the Board and management by:
• appointing new independent, unbiased directors to the Board who are both expertly capable and determined to steer a new course for the Company; and
• instituting corporate governance reforms, including applying a pay for performance compensation plan for management.
(2) Create and implement a new corporate strategy by:
• assessing the Company’s competitive prospects and strategic options for growth and profitability and implementing a new corporate strategy; and
• enlisting the guidance of telecommunications industry executives to assist with this review and strategy.
(3) Resolve the outstanding accounting, legal and regulatory issues by:
• concluding the internal accounting review and taking appropriate steps to rectify this matter;
• coming into full compliance with the rules of the Commission; and
• engaging with plaintiffs in the various lawsuits against the Company to seek timely resolutions.
Value Investors for Change urges you to vote FOR the Funds’ proposal to elect our Nominees on the enclosed WHITE proxy card, thereby ending this disregard for stockholder interests. For too long, MRVC has operated without proper oversight by the Board and has hidden behind poor corporate governance policies that neither respect the interests of the Company’s stockholders nor provide meaningful Board accountability. Vote to elect a new slate of directors who are willing to stand up for the interests of all stockholders and work to maximize stockholder value.
Conclusion
MRVC is an activist play with Value Investors for Change. Two things attract us to the stock:
1. MRVC’s NCAV is around $113.9M or $0.72 per share, although we note that the liquidation value is likely negligible and the financial statements are more than a year out of date, which makes any valuation problematic. One positive is the revenue: the company has annualized revenue of around $500M. A small improvement in margins could result in a big improvement in earnings.
2. We like the approach of Value Investors for Change.
We’re adding MRVC to our Special Situations portfolio at its $0.72 close yesterday.
MRVC closed yesterday $0.72.
The S&P500 closed yesterday at 1,025.56.
[Full Disclosure: We do not have a holding in MRVC. 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.]
Posted in Activist Investors, Avigen (NASDAQ:AVGN), Biotechnology Value Fund, Net Cash Stocks, Stocks, tagged Activist investment, Avigen Inc (NASDAQ:AVGN), Biotechnology Value Fund, Liquidation Value, Net Cash Stock on August 24, 2009| 1 Comment »
MediciNova Inc. (NASDAQ:MNOV) will acquire Avigen Inc (NASDAQ:AVGN) for $1.24 per share in cash or secured convertible notes. While the stock is trading at a slight premium to the bid, we’re taking the opportunity to exit. AVGN closed Friday at $1.29, which means we’re up 98.5% on an absolute basis. The S&P500 was at 816.21 when we opened the position, and closed Friday at 1,026.13, which means we’re up 72.7% on a relative basis.
Post mortem
We started following AVGN in December last year (see archived posts here) because it was a net cash stock and specialist biotechnology investor Biotechnology Value Fund (BVF) was pushing it to liquidate and return its cash to shareholders. Despite BVF’s failure to remove the board, we continued to maintain our position in AVGN because BVF won a number of important concessions from the board that made AVGN a much more attractive stock than it was when we started following it. We continuted to hold on when AVGN announced that it was back in negotiations with MediciNova, Inc. The consideration for the deal was announced as AVGN’s “net cash liquidation value plus $3 million” and “a contingent payment right for a specific product program milestone payment associated with Avigen’s Assignment Agreement with Genzyme Corporation, potentially subject to certain adjustments.” That seems tono longer be the case. The deal announced Friday calls for a payment of around $1.19 a share when the deal closes, with approximately $0.05 per share to be paid on June 30, 2010. This is a disappointing deal. AVGN has been sold for its net cash liquidation value plus $3M from MediciNova. We held on because we believed that there was a reasonable chance that AVGN could yield more than its then $1.34 share price when the “contingent payment right” capturing the near term payments from Genzyme was taken into account. MNOV has not provided AVGN shareholders with any value for AVGN’s AV411 assets and program.
Here is the press release announcing the sale (via MarketWatch):
MediciNova To Acquire Avigen For $1.24 a Share
William L. Watts
MarketWatch Pulse
LONDON — Biopharmaceutical firm MediciNova Inc. will acquire Avigen Inc. for $1.24 a share in cash or secured convertible notes, under an agreement announced Friday by the biopharmaceutical firms. Under the deal, around $1.19 a share will be paid when the deal closes, with approximately 5 cents a share to be paid on June 30, 2010. The transaction is expected to close in the fourth quarter, pending the approval of Avigen and MediciNova stockholders and other considerations. The companies said the merger will allow them to combine their neurological clinical development programs based on ibudilast, an anti-inflammatory drug.
[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. Do your own research before investing in any security.]
Posted in Activist Investors, Net Cash Stocks, Spencer Capital Management, Stocks, VaxGen Inc (OTC:VXGN), tagged Activist investment, Liquidation Value, Net Cash Stock, VaxGen Inc (OTC:VXGN) on August 21, 2009| 14 Comments »
Spencer Capital has filed preliminary proxy documents to remove the board of VaxGen Inc (OTC:VXGN). In the documents, Spencer Capital, which leads a group of investors calling themselves “Value Investors for Change,” call out VXGN’s board on its “track record of failure and exorbitant cash compensation”:
VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.
We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” Management has said that, if the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.
VXGN has now also attracted the attention of BA Value Investors, which has disclosed an activist holding and called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”
VXGN is up 25.0% since we initiated the position. At its $0.60 close yesterday, it has a market capitalization of $19.9M. We last estimated the company’s liquidation value to be around $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. The authors of a letter sent to the board on July 14 of this year ajudge VXGN’s liquidation value to be significantly higher at $2.12 per share:
Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.
Spencer Capital’s proxy solicitation is a welcome relief, and, with any luck, we will see a liquidation of VXGN soon, either at the hands of the present board, or by Value Investors for Change.
The preliminary proxy statement sets out the Value Investors for Change group’s “Reasons for the solicition” thus:
Even though VaxGen does not have substantial operations, Value Investors for Change believes that the Company has valuable assets, consisting of cash and net operating loss carryforwards (“NOLs”). We believe these assets should be unlocked for the benefit of shareholders, rather than consumed over time by the current Board.
We do not believe the members of the current Board are acting in the best interests of stockholders. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. Instead, the Board has overseen the consumption of a large portion of the Company’s assets while paying itself exorbitant compensation. In addition, the Board’s interests are not aligned with the stockholders, as displayed by their miniscule equity stake in the Company.
Consumption of Assets
Since discontinuing its operations, the Company has consumed a significant amount of assets. According to its most recent quarterly report on Form 10-Q, since June 30, 2008, the Company’s assets have decreased by $31.7 million, or 45%. Since December 31, 2008, the Company’s assets have decreased by over $3.5 million, or 8.4%.
In addition, the Company recorded $3.6 million in general and administrative expenses during the six month period ended June 30, 2009. Much of this expense consisted of cash compensation to the Board.
Exorbitant Board Compensation
Despite the relatively simple task of overseeing a shell company and conducting an ordinary sale process, the Board has paid itself inordinately high compensation. The table below describes the principal executive officer’s 2009 cash compensation and the director cash compensation scheme for the VaxGen Board, as described in the Company’s 2008 annual report on Form 10-K:
(This table has been modified from the original to fit this space)
* Consists of $195,000 annual base salary for 25 hours per week employment and a $193,050 lump sum payment. The lump sum payment was approved by the Board in consideration for Mr. Panek’s agreement not to resign for “good reason” under his employment agreement.
** VaxGen announced in its quarterly report for the period ended June 30, 2009 that, effective September 1, 2009, it had disbanded the Strategic Transactions Committee and that, following its disbandment, Board members would no longer receive additional compensation for service thereon.
While it is difficult to envision the rationale for the high cash compensation awarded to the Chairman Kevin Reilly and Franklin Berger, the most excessive portion of the director compensation consisted of the payments to the non-employee members of the Strategic Transactions Committee. Beginning in May 2008, Board members Lori F. Rafield and Paul DeStefano received $20,000 per month and $15,000 per month, respectively, for service on the Strategic Transactions Committee, which was formed to identify, review and evaluate potential strategic transactions and alternatives. Within a few months, these directors increased their compensation to $32,000 and $27,000 per month, respectively. This compensation is extraordinarily excessive.
Insignificant Board Equity Ownership
The members of the Board hold very few shares of the Company’s common stock. Most of the Board’s beneficial ownership holdings consist of underwater stock options. The following table describes the stockholdings of the Board, as set forth in the 2008 annual report, excluding options.
This Board has failed to take the steps we believe are necessary to preserve and enhance stockholder value. We believe the actions taken by the Board indicate that they are more interested in acting in their own self-interest rather than in the best interests of stockholders.
Value Investors for Change urges you to vote FOR the Fund’s proposal to elect the Nominees on the enclosed WHITE proxy card, thereby ending this disregard for stockholder interests. Vote to elect a new slate of directors who are willing to stand up for the interests of all stockholders and work to maximize stockholder value.
The members of the Board hold very few shares of the Company’s common stock. Most of the Board’s beneficial ownership holdings consist of underwater stock options. The following table describes the stockholdings of the Board, as set forth in the 2008 annual report, excluding options.
Hat tip bellamyj and matt.jensen08.
[Full Disclosure: We have a holding in VXGN. 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.]
Posted in Activist Investors, Axcelis Technologies Inc (NASDAQ:ACLS), Net Cash Stocks, Stocks, tagged Activist investment, Axcelis Technologies Inc (NASDAQ:ACLS), Liquidation Value on August 20, 2009| 2 Comments »
Axcelis Technologies Inc (NASDAQ:ACLS) has filed its 10Q for the period ended June 30, 2009.
We started following ACLS on January 8 this year (see our post archive here) because it is an undervalued asset play with an activist investor, Sterling Capital Management, holding 10.7% of its outstanding stock. ACLS has completed the sale of its 50% interest in SEN Corporation, its joint venture with Sumitomo Heavy Industries, Ltd. (SHI) to SHI for proceeds of $122.3 million. ACLS received around $35.9M in cash after applying $86.4M of the proceeds to meet obligations to the holders of the company’s 4.25% Convertible Senior Subordinated Notes, upon which ACLS defaulted in January. We last estimated ACLS’s liquidation value at around $117.8M or $1.14 per share. Following our review of the 10Q, we’ve reduced our estimate to $113.6M or $1.10, which is around 80% higher than its $0.60 close yesterday. Cash burn is a significant issue for ACLS. At the current rate of cash burn, we estimate the company has around six months before its liquidation value meets its current price, and around a year before it’s worthless.
The value proposition updated
During the three months ended June 30, 2009, ACLS continued to burn cash in its operations, which it attributes to the depressed semiconductor equipment market and the resultant decline in revenues. Cash and cash equivalents at June 30, 2009 were $56.8M, compared to $71.2M at March 31, 2009. The company attributes the $21.4M decrease in cash and cash equivalents to the cash used in operations and payments of fees and other costs associated with the sale of the investment in SEN. The company anticipates net cash outflows from operations in the remainder of 2009. Set out below is our adjusted balance sheet for ACLS (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):
We’ve been quite kind to ACLS by assuming only $50M of cash burn over the next twelve months. On its current form, $80M would have been closer to the mark. We’re assuming management takes some action to staunch the flow, but an assumptions like that might make us look like fools.
Conclusion
ACLS has made substantial operating losses over the last two years, and it is likely to be continue to do so. While its liquidation value of around $113.6M or $1.10 per share is more than 80% higher than its close yesterday of $0.60, it is likely to deteriorate while it continues its operating losses. ACLS continues to be our problem child, and we don’t think there is any good news on the horizon near-term, but we find it difficult to exit the position while it’s trading at a such a large discount to its (albeit deteriorating) liquidation value. Accordingly, we’re going to hold on for the moment, and see how the position plays out. If we get an opportunity to exit at close to value, however, we’ll take it. If the position hasn’t improved by the next Q, we’re likely sellers.
[Full Disclosure: We have a holding in ACLS. 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.]
Greenbackd 