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Archive for the ‘Greenbackd Portfolio’ Category

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 makes tender offer for AVGN at $1.00

Posted in Activist Investors, Avigen (NASDAQ:AVGN), Biotechnology Value Fund, Greenbackd Portfolio, Net Cash Stocks, Stocks, tagged , , , on January 16, 2009| Leave a Comment »

Biotechnology Value Fund (BVF) announced today that it intends to make a tender offer for all of the outstanding stock of Avigen, Inc. (NASDAQ:AVGN) that it does not own.

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.’s (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.

The tender offer statement filed with the SEC attaches the following press release from BVF:

Biotechnology Value Fund, L.P. To Make Tender Offer For Any And All Outstanding Shares Of Avigen At $1.00 Per Share

Tender Offer provides stockholders with a near-term cash alternative if BVF nominees are elected

BVF reaffirms support for downside-protected merger with MediciNova

NEW YORK, Jan. 15 /PRNewswire/ — Biotechnology Value Fund, L.P. (“BVF”) announced today that it intends to make a cash tender offer to purchase any and all of the outstanding common stock of Avigen, Inc. (Nasdaq: AVGN – News; “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. 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.

On January 9, 2009, BVF announced that it had delivered a notice to Avigen to call a special meeting of stockholders (the “Special Meeting”) to remove all incumbent directors and elect its own slate of stockholder-focused nominees

The tender offer will be conditioned on the following: (i) BVF’s nominees being elected to the board of directors of Avigen (the “Board”) at the Special Meeting (or otherwise appointed) and constituting a majority of directors on the Board, (ii) the Board redeeming rights issued under Avigen’s poison pill, (iii) Avigen not committing to any strategic transactions or capital-depleting actions, pursuant to the process described by Avigen on January 14, 2009 (or otherwise), and (iv) other customary conditions such as the absence of a suspension in trading or any material adverse change at Avigen. BVF may increase the tender price if Avigen’s unrestricted cash balance increases (for example, as the result of the sale of assets.) The tender offer is not conditioned on the availability of financing.

Mark Lampert, the general partner of BVF, stated, “The tender offer provides stockholders with a choice if BVF’s nominees are elected to the Board: they can either tender their shares for near-term cash at a premium to the market price or they can retain their shares and participate with BVF in the future of Avigen, whether through a merger with MediciNova, as hoped, or otherwise. This tender is the outgrowth of Avigen’s earlier rejection of our request that the Company provide downside protection for all shareholders. If elected to the Board, BVF’s nominees intend to pursue the downside-protected transaction proposed by MediciNova, or, if not possible, to consider other alternatives including a complete return of capital.”

Mr. Lampert continued, “Yesterday Avigen announced that it will spend stockholder money on not one, but two financial advisors. Why? We believe that Avigen could retain ten financial advisors and it won’t change the fact that the risk-reward profile of the proposed merger with MediciNova is extraordinary. We are concerned that this is just another example of the Board wasting stockholders’ assets; we question the Board’s underlying motivation for these actions and whether they are simply trying to remain in office at stockholders’ expense. In order to ensure no further deterioration of Avigen’s value, we urge stockholders to vote to remove all incumbent directors and elect the BVF nominees.”

BVF expects to file offering materials with the Securities and Exchange Commission and commence the tender offer within a reasonable time. Once the tender offer is commenced, offering materials will be mailed to Avigen stockholders and filed with the Securities and Exchange Commission. Avigen stockholders are urged to read the offering materials when they become available because they will contain important information.

[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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Portfolio construction

Posted in About, Greenbackd, Greenbackd Portfolio, Liquidation Value, Net Current Asset Value, Net Quick Stocks, Net Quick Value, Stocks, tagged , , on January 15, 2009| 2 Comments »

In our last post, we discussed our approach to long-term and fixed asset valuation. We concluded that, given our inability to actually value any given asset or class of assets, the best that we could do is fix a point at which we feel that we are more likely to be right than wrong about a stock’s value but would also have enough opportunities to invest. We argued that magic point for us in relation to property, plant and equipment is 50%, based on nothing more more than our limited experience. We acknowledge that this method will cause us to make many mistakes, so in this post we set out our method for protecting ourselves from those mistakes.

We try to protect ourselves from our mistakes in three ways:

  1. We try to buy at a substantial (i.e. more than 1/3) discount to our estimate of the written down value. Sometimes our valuation will be so wrong that the discount will be an illusion, and the real value will be well south of our estimate (maybe somewhere near Antarctica). In those instances, if the liquidation becomes a reality, we will lose money. In other instances, the real value will be higher than our estimate, and we will make money. Our hope is that the latter occurs more frequently than the former, but we are certain that the former will occur regularly.
  2. We try to buy a portfolio of these securities and we don’t concentrate too much of the portfolio in any one security. The more certain we are about a security, the larger the portion of the portfolio it will command. This means that net cash stocks that have ceased trading and are in liquidation or paying a special dividend take up a larger proportion of our portfolio than cash-burning industrials in liquidity crises with value wholly concentrated in property, plant and equipment (that said, at a big enough discount, they might take up a lot of the portfolio). This means that if any one stock, or even a handful of stocks, go to zero or thereabouts, they don’t destroy our entire stake and we can live to invest another day.
  3. We try to follow investors much smarter than we are. From our perspective, there’s no shame in riding on someone else’s coat-tails, especially when those coat-tails are on the back of someone smarter, better resourced and more experienced. This is one of the main reasons we only invest when we can see a Schedule 13D notice filed with the SEC (the other reason is that the 13D filing is the precursor to the catalytic event that removes the discount). Often, the 13D notice will set out the investor’s rationale for the investment, which may include their view on the stock’s valuation. While we always do our own research, we are comforted when we see other value-oriented investors in the stock, and we hope that experienced, professional, value investors are right more often than they are wrong (even though we know that they will also make mistakes).

The first method above attempts to limit the effect of an error in valuation on any given investment. We hope that if we’re wrong about the value, it’s only by a matter of degree, and we can salvage some value from the investment. The second limits the damage that a total, or near total, destruction of value in any one investment does to the portolio as a whole. The third is a check on our thought process. If we’re right about a situation, we’d expect to see investors smarter than we are already in the stock. If they’re not there, we’d have to look deep into the abyss before jumping in. We haven’t had to do that yet.

We hope that this better explains our approach to investment. Once again, we’re always keen to hear other points of view, or to have someone point out the obvious holes in the argument.

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Biotechnology Value Fund calls special meeting of AVGN stockholders

Posted in Activist Investors, Avigen (NASDAQ:AVGN), Biotechnology Value Fund, Greenbackd Portfolio, Net Cash Stocks, Stocks, tagged , , , on January 12, 2009| 3 Comments »

Biotechnology Value Fund (BVF) has requested that the board of Avigen, Inc. (NASDAQ:AVGN) call a Special Meeting of the stockholders for the purpose of replacing the board with BVF’s slate of director nominees. BVF proposes to replace the incumbent directors with directors who will support MediciNova, Inc.’s (NASDAQ:MNOV) offer for AVGN.

We’ve been following AVGN (see earlier posts here, here, here, here, here and 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. We think MNOV’s offer 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 around 40% higher than AVGN’s $0.86 close Friday.

The proxy materials filed with the SEC attach the following press release:

Biotechnology Value Fund, L.P. Calls Special Meeting of Avigen Stockholders To Remove Incumbent Directors and Elect Slate of Stockholder-Focused Nominees

Friday January 9, 2009, 1:21 pm EST

Calls Special Meeting to Enable Stockholders to Determine Fate of Company’s Remaining Cash

Believes Transaction Proposed by MediciNova, Inc. Offers Avigen Stockholders Extraordinary Risk/Reward Opportunity

SAN FRANCISCO, Jan. 9 /PRNewswire/ — Biotechnology Value Fund, L.P. together with its affiliates (“BVF”) today announced that it has requested that the Board of Directors of Avigen, Inc. (“Avigen”) (Nasdaq: AVGN – News) call a Special Meeting of the stockholders for the purpose of replacing the Board with BVF’s slate of stockholder focused nominees. BVF is the beneficial owner of approximately 29.6% of Avigen’s outstanding common stock.

BVF proposes to remove the members of the Board and replace them with directors who will work to ensure Avigen’s stockholders receive the maximum value for their investment in Avigen, while minimizing both downside risk and corporate waste. If elected, BVF’s nominees intend to take steps that would benefit all stockholders, including redeeming Avigen’s stockholder rights plan, working to consummate the proposed transaction with MediciNova, Inc. (“MediciNova”) and/or working to complete a distribution of Avigen’s assets to all stockholders.

BVF has nominated four highly qualified nominees, Mark N. Lampert, Oleg Nodelman, Matthew D. Perry and Robert M. Coppedge, as its slate of director nominees to be elected at the Special Meeting to replace Avigen’s entire existing Board. Messrs. Lampert, Perry, and Nodelman are currently employed by the General Partner of BVF. Mr. Coppedge is an independent nominee, with no economic interest in BVF, Avigen, or MediciNova. Avigen’s bylaws provide that the Board shall set the date of the Special Meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of receipt of BVF’s request. The bylaws further provide that if the Board does not provide notice of the Special Meeting within sixty (60) days following receipt of the request, BVF may set the time and place of the meeting and give the notice.

“We are deeply concerned with recent corporate actions at Avigen that are indicative of a Board that seems far more interested in remaining in place to do whatever it pleases with corporate assets than in returning value and protecting downside risk for all stockholders,” stated Mark N. Lampert, the General Partner of BVF. “Given that Avigen’s stock trades at a fraction of its tangible assets, it appears the marketplace shares our concerns. Accordingly, by calling the Special Meeting, we are providing stockholders with the opportunity to elect new directors who are committed to ensuring that Avigen stockholders, not an entrenched and unsuccessful management team and Board, determine the fate of the substantial remaining value.”

Mr. Lampert continued, “In addition to the Board’s unilateral expansion of ‘golden parachute’ payments for management and its unilateral adoption of the ‘poison pill,’ we are also concerned with the Board’s apparent dismissal of the compelling transaction proposed by MediciNova. Based on our analysis, we believe the transaction, as proposed, provides benefits to stockholders that the Board and management could not match on its own. In particular, we believe this deal would provide Avigen stockholders with:

  • Downside Protection: Based on our analysis, subsequent to the transaction, if MediciNova is unsuccessful Avigen stockholders will receive a modest discount to the current liquidation value of Avigen (which we estimate to be approximately $1.20/Share, net of debt and expenses), as determined by an independent auditor. This means that, even in the worst-case scenario, this transaction would yield an approximate 40% premium to Avigen’s current stock price.
  • Tremendous Upside Potential: Based on our analysis, if MediciNova is successful post-transaction, Avigen stockholders could own a substantial percentage of MediciNova – approximately 45% of the combined company. Under the best-case scenario, this could lead to an extraordinary, uncapped return for Avigen stockholders.
  • Free Option: Additionally, stockholders would have at least one year following consummation of the transaction to choose whether they want the downside protection or upside potential, as described above. We believe this free option period offers stockholders tremendous upside potential with low risk.
  • New Stewardship of Avigen’s Assets: If successfully completed, the transaction would also result in new stewardship of Avigen’s assets, curtailing this Board’s and management’s stated plan of seeking ways to utilize and, we fear, waste Avigen’s remaining assets. We believe stockholder focused management, with a substantial personal stake in the company, is key to protecting Avigen’s assets, particularly in light of Chief Executive Officer Ken Chahine’s recent statements regarding the future of Avigen, including that “it’s hard to put a finger on exactly what we would do,” that he “intends to build” over the next year and that he “thinks that there are opportunities outside of therapeutics.”
  • Unique Synergies: We also strongly believe there are unique synergies between MediciNova and Avigen that likely would not exist with other potential acquirers of Avigen. These synergies, we believe, give rise to the compelling nature of the transaction.”

Mr. Lampert added, “For these reasons, we believe Avigen should seriously pursue the transaction with MediciNova, a company in which we have no economic stake. We are extremely concerned that this Board and management, who collectively own less than 6% of Avigen, do not share our views. It is our hope that stockholders who share our concerns will be empowered to voice these concerns by removing the current Board and replacing them with directors who are serious about maximizing value and minimizing risk for all stockholders.”

[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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Multimedia Games Inc (NASDAQ:MGAM)

Posted in Activist Investors, Dolphin Limited Partnership, Greenbackd Portfolio, Liberation Investment Group, Multimedia Games Inc (NASDAQ:MGAM), Stocks, tagged , , , , on January 9, 2009| 5 Comments »

Multimedia Games Inc (NASDAQ:MGAM) is an undervalued asset play with two activist investors, Liberation Investment Group, which owns 8.7% of MGAM and has “urged the Company to retain an experienced investment bank to evaluate all strategic alternatives to maximize shareholder value and to expand the Company’s board of directors to include new independent directors who have strong industry backgrounds and are sensitive to shareholder concerns,” and Dolphin Limited Partnership, a formerly passive investor controlling 5.5% of the outstanding stock now seeking board representation. MGAM closed yesterday at $2.48, giving it a market capitalization of $66M. We estimate its liquidation value to be 50% higher at $98.3M, or $3.70 per share. The main risk to MGAM is the legal and regulatory environment. MGAM is involved in extensive litigation and its business operations and product offerings are subject to strict regulatory licenses, findings of suitability, registrations, permits and approvals.

About MGAM

MGAM is a supplier of interactive systems, server-based gaming systems, interactive electronic games, player terminals, stand-alone player terminals, video lottery terminals, electronic scratch ticket systems, electronic instant lottery systems, player tracking systems, casino cash management systems, slot accounting systems, slot accounting systems, slot management systems, unified currencies and electronic and paper bingo systems for Native American, racetrack casino, casino, charity and commercial bingo, sweepstakes, lottery and video lottery markets and provide support and services and operations support for MGAM’s customers and products. It designs and develops networks, software and content that provide its customers with, among other things, gaming systems, some of which are delivered through a telecommunications network that links its player terminals with one another, both within and among gaming facilities. MGAM’s investor relations website is here.

The value proposition

MGAM has been marginally cash flow positive for the last four years, generating good operating cash flow that seems to have been consumed in capital expenditures. That significant capital investment, while not reflected in earnings, still persists on the balance sheet (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):

mgam-summary

MGAM’s value resides in its $346.3M in property, plant and equipment, which we’ve written down by half to $173.2M or $6.51 per share. The company also has healthy receivables in the amount of $48.8M, which we’ve discounted by a fifth to $39.1M or $1.47 per share. MGAM has a substantial debt load of $87M or $3.27 per share. Our estimate for its liquidation value is around $98M or $3.70 per share.

MGAM’s most recent 10K reveals that the company is particularly vulnerable to the legal and regulatory environment. Its business operations and product offerings are subject to strict regulatory licenses, findings of suitability, registrations, permits and approvals. It is also involved in extensive litigation to protect its intellectual property rights, or defend claims that it is infringing upon the intellectual property rights of others. The outcome of this litigation is unknown and unknowable. It is conceivable that much of the company’s value could be lost in the litigation or as a result of changes to the regulatory environment.

The catalyst

Two activist investors, Liberation Investment Group and Dolphin Limited Partnership, have declared holdings in MGAM. Dolphin Limited Partnership’s original 13D filing sets out its rationale for it amending its filing from a passive to an activist stance:

[Dolphin Limited Partnership] are long-term shareholders of [MGAM]. [Dolphin Limited Partnership] have visited [MGAM]’s facilities in Oklahoma, Austin, Texas and Mexico and have conversed in person and by teleconference with members of the Board and senior management. On numerous occasions, [Dolphin Limited Partnership] have expressed their views on the strategic, operational and financial issues facing [MGAM] and have actively encouraged efforts to maximize shareholder value. Specifically, [Dolphin Limited Partnership] have highlighted the necessity to more efficiently finance [MGAM]’s growth opportunities with its key customers and sought to provide assistance to [MGAM] in May, 2008 in optimizing its balance sheet.

[Dolphin Limited Partnership] believe that the lack of a coherent business strategy, poor execution and poor capital allocation have contributed to significant deterioration in shareholder value. Specifically, [Dolphin Limited Partnership] are deeply concerned by the following:

  • On September 30, 2008, the price for [MGAM]’s Shares closed at a level at which the Shares traded over eight years ago.
  • Since the beginning of fiscal 2005, [MGAM] has invested over $360 million (over 3x the current market capitalization of [MGAM]) on capital and other expenditures. In that time, a $59 million cumulative cash flow loss has contributed to the share price falling over 72%. (See Chart below).
  • Since the Board was reconstituted in October, 2006, the price of [MGAM]’s Shares has declined 54%, while comparable companies, on average, are down only just 7%1.
  • Since its high following the ill-fated Dutch-auction tender in June, 2007, the price of [MGAM]’s Shares has fallen 66% while comparable companies2, on average, are down considerably less.
  • At the current share price, [MGAM] is trading at just 2.1x Enterprise Value/2009 EBITDA,3 while comparable companies4 average 7.7x — a 73% discount.
  • At the current share price, [MGAM] is trading at just over its tangible book value per share of $4.22.

[Dolphin Limited Partnership] believe the Board of [MGAM] has failed to close the significant valuation gap for its long-term investors. In light of these significant concerns and the erosion of shareholder value and the share price, [Dolphin Limited Partnership] began requesting a change in senior level management in February, 2007. More than a year later, [MGAM] finally heeded [Dolphin Limited Partnership]’ calls and made a change in June, 2008.

[Dolphin Limited Partnership] look forward to hearing a Board approved, detailed strategic operating plan by the 2008 fourth quarter conference call addressing how [MGAM] intends to close the sizeable valuation gap for its shareholders. [Dolphin Limited Partnership] intend to continue to pay special attention to opportunities to make the current operations of [MGAM] more productive, efficient and profitable, as well as plans to grow the business, with prudent use of [MGAM]’s valuable equity capital. Sell-side analysts are forecasting as much as $45-$50 million in free cash flow for fiscal 2009 from the Winstar facility ramp-up, increased machine counts and notes receivable repayments. The Board faces critical decisions as to how best to deploy this inflow to maximize shareholder value.dolphin-13d

In light of the unacceptable financial performance highlighted in the chart above, [Dolphin Limited Partnership] believe a rigorous debate about proper capital allocation is required. Heretofore, the Board has followed a formula that has led to the destruction of shareholder value. [Dolphin Limited Partnership] are seeking Board representation because they understand the necessity of reversing this negative trend. As one of the largest shareholders, [Dolphin Limited Partnership] have a strong incentive to maximize shareholder value. Accordingly, in September, 2008, [Dolphin Limited Partnership] sent a letter to [MGAM] requesting consensual representation on the Board. [Dolphin Limited Partnership]’s representative(s) will be committed to working with the other members of the Board to evaluate all strategic and other alternatives to set [MGAM] on a path to maximizing shareholder value.

1 Comparable companies include IGT, WMS, BYI, ALL AU and SGMS.
2 See footnote 1.
3 Based on Bloomberg average analyst estimates. MGAM average analyst fiscal 2009 estimate of $73 million.
4 See footnote 1.

Liberation Investment Group now controls around 8.7% of MGAM’s outstanding stock. Liberation Investment Group’s original 13D filing attached the following letter to the board setting out its demands:

February 2, 2006

Mr. Clifton Lind
Chief Executive Officer
Multimedia Games, Inc.
206 Wild Basin Rd
Bldg B, Suite 400
Austin, Texas 78746

Dear Clifton:

As you know, Liberation Investments has been a shareholder in Multimedia Games for a year now. We believe the business has substantial value that isn’t reflected in its current stock price. In order to unlock this value for the benefit of all shareholders, we have developed several strategies which we have discussed with you on more than one occasion. We have also offered to introduce you to people with relevant expertise.

I met with you in September of 2005 at the G2E conference in Las Vegas. At that time, I gave you a presentation outlining three specific transaction alternatives which we believe would greatly enhance shareholder value. Shortly thereafter, an investment bank experienced in the gaming industry presented you with another potential option, which we believe would increase shareholder value. Despite our efforts to engage with you, you have not returned our calls since our meeting, except on one occasion when Randy Cieslewicz informed me that Multimedia’s Board would review the information we provided to you at its meeting during the first week of December 2005. Since then, we have not heard any feedback nor seen any progress.

We are disappointed by your lack of responsiveness, especially in light of Multimedia’s languishing stock price. It is currently trading below its levels of even four years ago. What’s more, we believe that Multimedia’s stock trades at a multiple that is significantly discounted to that of its industry peers.
Clearly, the company is not able to take full advantage of the public capital markets under these circumstances.

Now is the time to act. Multimedia must take real steps to boost shareholder value. The company should retain an experienced investment bank immediately to evaluate all strategic alternatives to maximize shareholder value. Furthermore, Liberation believes that you should add new members to the Board who have strong industry backgrounds and are sensitive to shareholder concerns. We have identified some potential candidates who are currently (or have previously been) licensed in major gaming jurisdictions, and would like to discuss with you the possibility of adding these qualified candidates to the Board.

If patient shareholders don’t see real progress quickly, you can be fairly certain that they will soon become frustrated shareholders who will demand progress. We have spoken to other large shareholders who are likewise disappointed by the performance of Multimedia’s stock and who we believe would be supportive of efforts to increase value through the execution of a strategic transaction.

Lastly, given that you have been aware of our interest in a strategic transaction for some time, we wonder why you have yet to file a proxy statement and schedule an annual meeting for 2006. The company’s amended annual report filed on January 30, 2006 provided no reason for missing the usual 120-day deadline. It has already been over a year since Multimedia filed its last proxy statement.

Liberation Investments is prepared to meet with the Board and/or the company’s financial advisors to further discuss the range of alternatives available to Multimedia and answer any questions about our presentation. Please feel free to call me to set up a meeting. As always, we remain committed to working with you to maximize value for all shareholders.

Very truly yours,

Emanuel R. Pearlman
Chairman and CEO

MGAM has now consented to Dolphin Limited Partnership’s nominee being appointed to the board, as the following letter from MGAM filed with Dolphin Limited Partnership latest 13D explains:

December 26, 2008

Dolphin Limited Partnership III, L.P.
156 W 56th Street
Suite 1203
New York, New York 10019
Attn: Mr. Justin Orlando
Vice President and Managing Director

Dear Mr. Orlando:

This letter is to confirm that the Nominating and Governance Committee of the Board of Directors (the “Board”) of Multimedia Games, Inc. (“MGAM” or the “Company”) has resolved to include your name with the Company’s slate of nominees for the Company’s Board of Directors at the Company’s upcoming annual meeting of stockholders, and to support your candidacy to the same extent as the candidacies of the other Company nominees. The Company’s Board of Directors has also unanimously approved this recommendation. The Company intends to hold its annual meeting on or about April 6th or 7th, 2009, and looks forward to your joining the Board at that time.

We would also like to invite you to attend our regularly scheduled meeting of the Board of Directors to be held telephonically on January 8th. We would ask that you and Dolphin Limited Partnership III, L.P. sign a standard confidentiality agreement in connection with your attendance at that meeting. Our counsel will provide a form to your counsel to review.

We look forward to your joining the board and working with you to build value for our stockholders.

Very truly yours,

Mike Maples, Chairman of the Board

Liberation Investment Group’s most recent 13D filing seems to suggest that it is liquidating its position in MGAM by distributing to its investors its proportionate share of MGAM stock.

Conclusion

At $2.48, MGAM is trading at two-thirds of our $3.70 per share estimate of its liquidation value. With Dolphin Limited Partnership’s nominee being invited to join the board, it seems that the chances of the company henceforth taking shareholder-friendly steps are good. The main risk to MGAM remains the legal and regulatory environment, with legal proceedings threatening much of the company’s value. Without knowing the detail of the litigation beyond what is disclosed in the financial statements, it is impossible to handicap the company’s chances. At these levels, we still think that MGAM is a worthwhile investment, but we will watch closely any and all developments in its various legal proceedings.

MGAM closed yesterday at $2.48.

The S&P500 Index closed yesterday at 909.73.

[Disclosure:  We do not have a holding in MGAM. 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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Axcelis Technologies Inc (NASDAQ:ACLS)

Posted in Activist Investors, Axcelis Technologies Inc (NASDAQ:ACLS), Greenbackd Portfolio, Sterling Capital Management, Stocks, tagged , , , on January 8, 2009| 4 Comments »

Axcelis Technologies Inc (NASDAQ:ACLS) is a new addition to the Greenbackd Portfolio at its $0.60 closing price yesterday. ACLS is an undervalued asset play with an activist investor, Sterling Capital Management, holding 10.7% of its outstanding stock. At $0.60, the company has a market capitalization of $61.8M. We estimate that its liquidating value is more than 110% higher at $134.9M, or $1.31 per share. The caveat? The company is making substantial operating losses that have widened over the last five quarters, prompting Sterling Capital Management to detail to ACLS management an aggressive restructuring strategy to salvage for stockholders what value remains.

About ACLS

ACLS designs, manufactures and services ion implantation, dry strip and other processing equipment used in the fabrication of semiconductor chips. In addition to equipment, ACLS provides aftermarket service and support, including spare parts, equipment upgrades, maintenance services and customer training. The company owns 50% of SEN Corporation (SEN), a producer of ion implantation equipment in Japan. SEN licenses technology from ACLS  for certain ion implantation products and has exclusive rights to market the licensed products in Japan. The investor relations website is here.

The value proposition

The last five quarters have not been kind to ACLS, with the company generating substantial and increasing operating losses in each, reaching a $22.8M nadir for the September quarter (see the Q3 10Q here). At present, some value remains on the balance sheet (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):

acls-summary1

ACLS’s liquidating value is predominantly carried in its $177M in inventory, which we’ve written down by a third to $119M or $1.15 per share, and its long term investment in $136M SEN, which we’ve written down by 80% to $20.4M or $0.20 per share. The company has around $49.7M or $0.48 per share in cash and a further $12.6M or $0.12 per share in restricted cash. The company also has around $36.6M in receivables, which we’ve discounted by a fifth to $29.3M or $0.28 per share. Deducting the $1.38 per share in liabilities (including $0.80 per share in debt) leaves a value in liquidation of around $134.9M or $1.31 per share.

The catalyst

Sterling Capital Management has been in regular contact with ACLS since acquiring its original stake in October 2007. They began communicating with ACLS in November of that year, “[encouraging] management and the board of directors to move forward on several actions designed to enhance shareholder value” including “[hiring] an investment banking firm to solicit interest for a minority, majority, or strategic investment in [ACLS].” (See the full text of Sterling Capital Management’s first letter to ACLS here.)

In February 2008, Sterling Capital Management again pushed ACLS to “immediately hire an advisor and fully explore strategic alternatives.” When Sumitomo Heavy Industries (SHI), ACLS’s SEN joint venture partner, offered to acquire ACLS for $5.20 per share, Sterling Capital Management wrote:

We strongly encourage [ACLS]’s Board to fully engage SHI and work to determine if a combination is appropriate. Further, we also would expect the Board and its advisors to solicit interest from other parties that might have a desire in partnering with [ACLS].

In a subsequent February 2008 letter, Sterling Capital Management argued that the initial bid of $5.20 per share for ACLS was “clearly too low,” writing:

Even with strong industry headwinds and lack of traction to-date, it is appropriate to value [ACLS] assuming some modest level of Optima success. Our analysis would indicate that a fair price for [ACLS] under this scenario would approximate $7.00 to $7.50 per share.

When SHI increased its offer to $6.00 per share, Sterling Capital Management wrote in March 2008:

[It] would appear that we are no closer to achieving an open dialogue between Axcelis and SHI.

…

We are concerned that the Board and its advisors are utilizing overly optimistic assumptions regarding Optima’s ultimate market share gains and consequently embracing an intrinsic value which is not achievable.

Sterling Capital Management argued in a May 2008 letter that the failure of nominated directors at ACL’s Annual Meeting of Stockholders to receive a majority of the shareholder vote in support of their re-election demonstrated shareholders’ “discontent with the failure of the Board to fully engage SHI in negotiations that could ultimately lead to a transaction that fairly values our company.” Clearly growing frustrated with ACLS, Sterling Capital Management wrote:

Rather than battling your shareholder base, we encourage you and the Board to embrace the steps necessary to drive shareholder value via a transaction with SHI.

In Sterling Capital Management’s most recent 13D filing they write:

We believe that [ACLS] management is making good progress in addressing the company’s short term financing issues. Further, the recently announced restructuring effort should assist the company in weathering an environment of continued weak spending However, given the highly cyclical nature of the semiconductor capital equipment market, it is imperative that management actively explore all opportunities to better position [ACLS] for long term success and creation of shareholder value. As such, Sterling Capital has communicated to management of [ACLS] a concept of separating its systems business from the more stable aftermarket business. In addition to separating cyclical from non-cyclical businesses, this initiative would allow for efficient utilization of the cash currently residing on SEN’s balance sheet and the tax benefits associated with extensive NOLs at [ACLS].

Sterling Capital Management also attached their most recent letter to ACLS (reproduced below):

Ms. Mary Puma
Chairman and CEO
Axcelis Technologies, Inc.
108 Cherry Hill Drive
Beverly, MA 01915-1053

Dear Mary,

These are certainly unprecedented times which we all are trying to navigate through. We appreciate the focus and effort the entire team at Axcelis has demonstrated during the current environment. However, given the challenges facing the company, we would strongly encourage Axcelis to embrace an altered strategy which would produce both immediate and long term value for all constituents.

The initiative described below attempts to utilize all of the many resources and assets that Axcelis claims which clearly are not being recognized by the public markets. Further, we believe that the ultimate corporate structure it defines provides a more appropriate division between
cyclical and stable businesses.

Please consider:

o In March of 2008 SHI made an offer to purchase all of Axcelis’ outstanding shares for $6 per share or approximately $618 million dollars. Combined with debt on the balance sheet of Axcelis the total offer equated to $700 million. Through direct conversations with SHI and public documents it was clear that the motive behind this transaction was to consolidate the ion implant business of both Axcelis and SEN. Such a combination would yield significant cost synergies as well as enhanced product offerings.

The plan outlined below would allow SHI to achieve their initial goal, resolve short and long term financial challenges at Axcelis, and importantly create significant value for shareholders.

o Axcelis sells its implant/ dry strip systems business along with its 50% interest in SEN to SHI for $136 million. This figure approximates the book value of the SEN investment on Axcelis’ balance sheet. Importantly, such a price tag would require minimal net cash outlays by SHI as this transaction would give them immediate access to the entire $140 million of net cash currently on the books at SEN. SHI would have the ability to merge these operations and garner the synergies available.

o Axcelis Corporation would become solely focused on the aftermarket business which would include exclusive rights for SEN/Axcelis legacy accounts. The aftermarket business generates approximately $120 million in annual revenue and claims gross margins in excess of 50%. If properly sized such a business should be able to produce operating margins near the 20% level.

o Axcelis would retain existing NOLs which total $150 million and could then be applied to the operating profits generated by the aftermarket business. These NOLs could be fully utilized as no change of control event would be triggered.

o After repayment of the $85 million of debt the newly restructured Axcelis would have net cash of approximately $100 million. Given the low capital intensity of the aftermarket business and its relative stability, at least $50 million of this cash could be used for share repurchases. Assuming an average repurchase price of $1.50 per share Axcelis could retire 33 million shares.

o The new Axcelis would have approximately 70 million shares outstanding (after repurchases) and be generating $0.30 in eps. Applying a 10X multiple on this business would equate to a stock price of $3 per share. Revenue and earnings could grow at the new Axcelis as the market rebounded and SEN proved successful expanding its market share.

o The new Axcelis would have additional assets including net cash of $50 million and an unencumbered headquarters/ property which was recently appraised at almost $60 million.

Clearly, the above scenario is very different than the outcome we had all hoped for just a few months ago. However, there is no question that the world has changed and that looking forward and embracing the altered landscape is a prerequisite for future success. We hope that the Board might give full consideration to our proposal and we look forward to continuing to work with you in moving Axcelis forward.

Sincerely,
STERLING CAPITAL MANAGEMENT LLC
Brian R. Walton, CFA
Managing Director

Conclusion

At its $0.60 closing price yesterday, ACLS is trading at less than half of our estimate of its $1.31 per share value in liquidation. Its substantial and widening operating losses over the last five quarters have led management to make some efforts to restructure, which Sterling Capital Management believes will help ACLS in “weathering an environment of continued weak spending.” The company has thus far resisted Sterling Capital Management’s efforts to have ACLS negotiate with SHI or another bidder. Sterling Capital Management appears tenacious and so we think they may be able to persuade ACLS to create significant value for stockholders. With a downside limited by its presently substantial value in liquidation, we think ACLS is worthy addition to the Greenbackd Portfolio.

ACLS closed yesterday at $0.60.

The S&P500 Index closed yesterday at 906.65.

[Disclosure:  We don’t have a holding in ACLS. We have now acquired 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.]

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Cobra Electronics Corporation (NASDAQ:COBR)

Posted in Activist Investors, Cobra Electronics Corporation (NASDAQ:COBR), Greenbackd Portfolio, Howson Tattersall, Stocks, tagged , , on January 6, 2009| 3 Comments »

Cobra Electronics Corporation (NASDAQ:COBR) is another tiny undervalued asset play with an activist investor – Howson Tattersall Investment Counsel Limited – disclosing a 10% holding in its 13D notice filed September 24 last year. At its $1.11 close yesterday, COBR has a market capitalization of just $7.2M. We estimate that its liquidating value is almost 100% higher at $14.2M or $2.19 per share and the first new addition to the Greenbackd Portfolio for 2009.

About COBR

COBR is a designer and marketer of two-way mobile communications products in the United States, Canada and Europe. The Company has seven product lines: two-way radios, radar detectors, Citizens Band radios, power inverters, mobile navigation, marine consumer electronics, and photo-enforcement and safety detection. The company’s investor relations website is here.

The value proposition

COBR has generated mildly positive earnings for the last three quarters but has generally lost money since 2006. As always, there is some value on the balance sheet (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):

cobr-summary

COBR’s value in liquidation is predominantly in its $22.8M in receivables, which we have discounted by a fifth to $18.2M or $2.82 per share, and $29.6M in inventory, which we value at $19.8M or $3.06 per share. The other source of value on the balance sheet is COBR’s $27.5M property, plant and equipment, which we’ve written down by half to $13.7M or $2.12 per share. COBR has $14.2M in debt and other substantial liabilities in the amount of $45.8M or $7.08 per share. Deducting COBR’s liabilities from its written down asset value, we estimate COBR’s liquidating value at around $14.2M or $2.19 per share, which is 97% higher than its $1.11 close yesterday.

The catalyst

Howson Tattersall Investment Counsel Limited’s 13D notice filed September 24, 2008 discloses a 10% holding in COBR but little else – it adopts the standard boilerplate in its filing. Howson Tattersall’s website does discuss its equity investment philosophy:

Our equity investment process is based on value investing because it provides a consistent, statistically grounded approach to the analysis of investment opportunities.

…

After narrowing the universe of potential investments to companies with attractive quantitative factors, we undertake independent qualitative research, which is at the core of our selection process. This involves reviewing financial statements and meeting with company management.

Conclusion

While its earnings record is spotty, with a $2.19 liquidating value some 97% higher than its closing price yesterday, COBR is very cheap. We can’t divine Howson Tattersall’s modus operandi from its public documents, which makes it difficult to determine its effectiveness as a catalyst. This doesn’t concern us too much as COBR’s steep statistical discount to its value should provide downside protection which will leave the upside to take care of itself.

Take care to use limit orders if you propose to trade in COBR as the stock is very thinly traded.

COBR closed yesterday at $1.11.

The S&P500 Index closed yesterday at 927.45.

[Disclosure:  We don’t have a holding in COBR. 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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Welcome back for 2009 and update on Greenbackd Portfolio holdings

Posted in About, Autobytel (NASDAQ:ABTL), Avigen (NASDAQ:AVGN), Barnwell Industries (AMEX:BRN), Borders Group (NYSE:BGP), Chromcraft Revington (AMEX:CRC), Greenbackd, Greenbackd Portfolio, InFocus Corporation (NASDAQ:INFS), Kona Grill Inc (NASDAQ:KONA), MathStar Inc (OTC:MATH), Stocks, ValueVision Media (NASDAQ:VVTV), Zale Corporation (NYSE:ZLC), tagged , , , , , , , , , on January 5, 2009| Leave a Comment »

Welcome back to Greenbackd and happy new year for 2009. We hope that you had a good break. There have been a number of positive developments in the companies we discussed last year. Set out below is an update on those positions we had open in the Greenbackd Portfolio at the close of 2008:

  • Trilogy has increased its stake in ABTL to 7.4%. ABTL is up 18.6% since our first post but we are maintaining our position because we think it’s still worth 50% more.
  • BVF has endorsed the MNOV offer for AVGN. AVGN is up 20% since our first post but we are holding on because we think the merger presents an opportunity for AVGN’s stockholders to receive around $1.20 per share in cash (almost 60% higher than AVGN’s $0.78 close Friday) and the possibility of “an extraordinary, uncapped return” if MNOV is successful post-merger.
  • BRN has filed its September 10Q and we believe that its liquidation value has increased from $6.52 per share to $6.91 per share. The stock is up 41% since our initial post. We still see the liquidation value some 40% higher than BRN’s Friday close of $4.95, so we will maintain our position.
  • CRC is down 6.3% from our initial post. Other than the retirement of the CFO, we have no other news to report. With CRC in a liquidity crisis, the retirement of the CFO is a worrying development. That said, we see CRC’s liquidation value at around $2.45 per share, which is more than 450% higher than its Friday close of $0.43, so we propose to maintain our position.
  • A group of “high-powered executives” plan to save INFS from “New York sharks.” The stock is up 15.9% to $0.73 since our initial post. Its liquidating value is still some 58% higher at $1.15 per share and so we are maintaining the position.
  • We’ve closed our position in KONA for an 88% gain in 18 days.
  • A new activist investor has filed a 13D for MATH and is lobbying the company to liquidate. MATH is up 17.7% since our first post but it’s still trading at half its liquidating value and a little more than half its net cash backing, so we’re maintaining our position.
  • ZLC is off 16.8% from our initial post. We’ve estimated its liquidation value at $7.63 per share, which is still 90% higher than its $4.01 close Friday, so we are maintaining our position in ZLC.

Although it is still too early to determine how Greenbackd’s strategy of investing in undervalued asset situations with a catalyst is performing, we’ve set out below a list of all the stocks we’ve included in the Greenbackd Portfolio and the absolute and relative performance of each. This is the standardized format we propose to adopt to track Greenbackd’s performance at 6-monthly intervals:

Current holdings (As at January 5, 2009)

greenbackd-portfolio-current-holdings-performance

Former holdings (As at date of our closure of the position)greenbackd-portfolio-former-holdings-performance

The absolute total return across the current and former positions as at January 5, 2009 is 14.2%, which is 8.4% higher than the S&P500’s return over the same periods. As we discussed above, the holding periods for Greenbackd’s positions has been too short to provide any meaningful information about the likely performance of the strategy over the long term (2 to 5 years), but we believe that the strategy should outperform the market by a small margin.

We look forward to bringing you the best undervalued asset situations we can dig up in 2009.

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