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Net Net vs Activist Legend: And the winner is…

Posted in Activist Investors, Carl Icahn, Dataram Corporation (NASDAQ:DRAM), Stocks, Yahoo! (NASDAQ:YHOO), tagged , , , , on December 8, 2009| 6 Comments »

Greenbackd is dedicated to unearthing undervalued asset situations where a catalyst exists likely to remove the discount or unlock the value. My favorite stocks are those trading at a substantial discount to net current assets or liquidation value, with an activist pushing for a catalyst to unlock the value. Those opportunities, however, are few and far between. I can frequently find deeply undervalued asset situations with no obvious catalyst. I can often also find activists in stocks that are not undervalued on a Graham asset basis.

A little over a year ago in a post titled Net Net vs Activist Legend I started a thought experiment pitting Dataram Corporation (NASDAQ:DRAM), a little Graham net net, against activist investing legend Carl Icahn and his position in Yahoo! Inc. (NASDAQ: YHOO) (click on the links to laugh at how rudimentary Greenbackd looked then). The idea was simple: Compare the performance of two stocks, one a net net / net cash stock lacking a catalyst, and the other a stock not obviously undervalued on an asset basis, but nonetheless pursued by an activist investor, Carl Icahn.

In the blue corner, YHOO, the super heavyweight

Here’s what I had to say about YHOO at the time:

YHOO is a stock that is not cheap on an asset basis but it does have a prominent activist investor with a 5.5% stake and two seats on the board. At its Friday close of $11.66, which is around two-thirds lower than Microsoft’s May 2008 $33 bid, YHOO still trades at a 70% premium to our $6.82 per share estimate of its asset value. Activist investor Carl Icahn’s presence on the register, however, indicates that he believes YHOO is worth more. Icahn has paid an average of $23.59 per share to accumulate his 5.5 percent stake. At $11.66, YHOO must more than double before Icahn will see a profit. He’s unlikely to sit idly by to see if that happens.

…

YHOO is not cheap on any theory of value we care to employ. It is trading at a substantial premium to its asset backing, which means the market is still generously valuing its future earnings. It is generating substantial operating cash flow and earnings, which in a better market might be worth more, but it’s not obviously cheap to us.

The best thing about YHOO from our perspective is the presence of Carl Icahn on the register. His holdings were purchased at much higher prices than are presently available and he is unlikely to sit idly by while the stock stagnates.

Buying YHOO at these prices is a bet that Icahn can engineer a deal for the company. Given his legendary status as an activist investor earned through canny acquisitions over many years, we think that’s a good bet. But a bet is what it is – it’s speculation and not investment. If speculation is your game, then we wish you the best of luck but know that the price might fall a long way if he sells out. If you’re an investor, the price is too high.

YHOO closed Friday at $11.66 and the S&P 500 Index closed at 876.07.

And in the red corner, DRAM, a light flyweight

Here’s my take on DRAM’s chances:

DRAM, at 58% of its liquidating value and 76% of its cash backing, is very cheap. We believe that it is worth watching but, with no obvious catalysts and a high cash burn rate, probably one to avoid unless you are willing to bet that its remaining cash might attract an activist or the business will turn around before it runs out of money.

…

The risk with DRAM, as it is with any net net or net cash stock, is that the company might not make a profit any time soon and won’t liquidate before it dissipates its remaining cash. As we said above, we’ve got no insight into DRAM’s business and don’t know whether it can trade out of its present difficulties and back to at least a positive operating cash flow. According to the 10Q, the company is authorized to repurchase 172,196 shares under a stock repurchase plan but this is an immaterial amount in the context of the 8.9M shares on issue and the plan has been in existence since 2002. The best hope for the stockholders is that the company re-institutes its dividend, which, given its $16M in cash, it certainly seems able to do. No noted activists have disclosed a holding in the company, which means management have no incentive to do anything so stockholder friendly.

Let’s get ready to rumbllllllllllllllllllllllllle…..

Here’s the call of the fight:

The first 10 rounds were to YHOO, but DRAM landed a crushing blow at the end of the 10th. From there, DRAM pounded away while YHOO got the staggers. At the final bell, YHOO managed a respectable 34.2%, but it wasn’t in DRAM’s league, up an incredible 192.8%.

Post mortem

There’s nothing statistically significant about this little experiment, but, regardless, I think it’s interesting. As I’ve discussed in previous posts, small investors have a huge advantage over larger, professional investors. There is nothing easier to analyse than a Graham net net or liquidation play (here’s my post on Graham’s liquidation value methodology), and, as Professor Henry Oppenheimer demonstrated, the returns to a very simple buy-and-hold-for-a-year-and-repeat strategy will put investment professionals to shame. Graham’s methodology is robust and has withstood the test of time. With a little patience, investing like Graham did provides a tailwind that forgives many investing sins. Here’s to the little guys.

Gonna fly now

Go. Go. Go. Go. Go. Goooooooooo…..

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5 tips for the next generation of activist investors

Posted in About, Activist Investors, Eric Jackson, Ironfire Capital, Yahoo! (NASDAQ:YHOO), tagged , on April 7, 2009| Leave a Comment »

In an article on his Breakout Performance blog, Activist Investors Sidelined by Brutal Market, Dr. Eric Jackson gives some advice to the next generation of activist investors. Jackson is the founder of Ironfire Capital, an activist fund manager that uses “Internet-based social networking tools to gather information and amplify the impact of current focus campaigns,” and is perhaps best known for his campaign against Yahoo! Inc (NASDAQ:YHOO). Jackson believes that, to be successful, the next generation of activists must do the following:

  1. Hedge, in order to preserve partner capital in the event of terrible years like 2008. The days of long-only are over.
  2. Build a reputation for always doing right for shareholders (especially long-term holders). Some of the “quick fix” activists of the last five years never won the trust of large mutual funds and pension funds, who tend to be the biggest holders of stock of the large-cap companies. As a result, proxy contests failed to win over the support of this important constituency, for fear of how these activists would represent their interests properly.
  3. Focus more on strategy and operations, less on single events. There will always be a place for activist investors to go after a company, advocating they sell a single division, or do a quick dividend to shareholders. However, these situations tend to be more prevalent in small-cap companies. Large-cap companies, by definition, have more complex problems and require more complex solutions. The next generation of top activists will understand this and have deep expertise in their firms on strategy and operations.
  4. Use the tools of the Internet and social networking. In 2007, when I ran a successful activist campaign against Yahoo!, which resulted in unseating Terry Semel as CEO after a large “no” vote at the annual meeting, I owned 96 shares of Yahoo! However, I was able to get my message out to large and small shareholders via my blog, YouTube, wikis, Facebook and Twitter. More than calling attention to my ideas, these social networking tools allowed fellow shareholders to pledge support to my group and encouraged them to suggest additional ideas for how Yahoo! could improve. I was most surprised and pleased with how many existing Yahoo! employees participated. Yet, their interests were perfectly aligned with our groups: We were all stockholders of Yahoo! and wanted to see the stock price go up through needed changes, which the current board and management were not making. The next generation of large activist investors will be masters at using the Internet to conduct their campaigns.
  5. Be more collaborative, less combative with target companies. It will always be necessary to run successful — sometimes nasty — proxy contests against entrenched boards and management. In my opinion, the Yahoo! board, for example, will never respond to a “nice guy” activist approach. It is so entrenched and disconnected from the opinions of shareholders that it would be impossible to reason with them. There’s a time to knock heads. However, some activists only knock heads. They only know how to hit one key on the piano. The next generation of activist investors will be able to play hard ball but tend to be much more collaborative with the board and the CEO — at least at the beginning, until reasonable dialog leads nowhere. Such an approach is also far less expensive than an “all-negative, all-the-time” approach.

Jackson makes an interesting point. A full blown proxy battle is prohibitively expensive for all but the very biggest stockholders (and even then it is an unappetizing prospect if it will materially reduce returns). If regulatory reform makes nominating directors a simpler and cheaper process – which the SEC’s proposed “proxy access” rules do – then the “tools of Internet and social networking” become potent weapons that act to level the playing field for the smaller investor. Such a change could create a new generation of web-savvy micro activists, who control only a handful of shares but understand how to use social networking media to influence boards, much like Jackson does with Ironfire Capital and his blog. But with a small capital base, how does Jackson make the campaign worth his while? In other words, how does he get paid?

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The Icahn Lift

Posted in About, Activist Investors, Carl Icahn, Yahoo! (NASDAQ:YHOO), tagged , on December 25, 2008| Leave a Comment »

We’re unabashed fans of Carl Icahn, who’s reputation for pushing up the stock prices of the companies he invests in has led to a phrase that describes his Midas touch: the “Icahn lift.” We’ve previously covered the billionaire investor’s antics in YHOO here. Our gift to you is 60 Minutes’ August profile on Icahn:

It takes a certain breed of stock market investor, the kind with lots of money and lots of guts, to thrive in queasy times like these, when the market keeps losing altitude. Carl Icahn is one of that breed.

He has a knack for turning someone else’s loss into profit for himself. But he can also help others improve their bottom line through the so-called “Icahn Lift,” an upward bounce that often happens when he starts buying a beleaguered stock.

To see the video, click here: (60 Minutes’ “The Icahn Lift”). Enjoy!

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Yahoo! Inc. (NASDAQ: YHOO)

Posted in Activist Investors, Carl Icahn, Stocks, Yahoo! (NASDAQ:YHOO) on December 8, 2008| 2 Comments »

Today we continue our “Net Net vs Activist Legend” thought experiment, with Yahoo! Inc. (NASDAQ: YHOO).

YHOO is a stock that is not cheap on an asset basis but it does have a prominent activist investor with a 5.5% stake and two seats on the board. At its Friday close of $11.66, which is around two-thirds lower than Microsoft’s May 2008 $33 bid, YHOO still trades at a 70% premium to our $6.82 per share estimate of its asset value. Activist investor Carl Icahn’s presence on the register, however, indicates that he believes YHOO is worth more. Icahn has paid an average of $23.59 per share to accumulate his 5.5 percent stake. At $11.66, YHOO must more than double before Icahn will see a profit. He’s unlikely to sit idly by to see if that happens.

About YHOO

According to the Overview section of the company’s most recent 10Q*, YHOO “is a leading global Internet brand and one of the most trafficked Internet destinations worldwide.” Clear enough, but here is where the 10Q gets weird:

We are focused on powering our communities of users, advertisers, publishers, and developers by creating indispensable experiences built on trust.

We have no idea what “indispensable experiences built on trust” means. We’d be keen to hear your thoughts in the comments (but we digress):

We seek to provide Internet services that are essential and relevant to these communities of users, advertisers, publishers, and developers. Publishers, such as eBay Inc., WebMD, Cars.com, Forbes.com, and the Newspaper Consortium (our strategic partnership with a consortium of more than 20 leading United States (“U.S.”) newspaper publishing companies), are a subset of our distribution network of third-party entities (referred to as “Affiliates”) and are primarily Websites and search engines that attract users by providing content of interest, presented on Web pages that have space for advertisements. We manage and measure our business geographically. Our geographic segments are the U.S. and International.

According to Wikipedia, YHOO:

…provides Internet services worldwide. The company is perhaps best known for its web portal, search engine, Yahoo! Directory, Yahoo! Mail, news, and social media websites and services. Yahoo! was founded by Jerry Yang and David Filo in January 1994 and was incorporated on March 1, 1995.

According to Web traffic analysis companies (including Compete.com, comScore, Alexa Internet, Netcraft, and Nielsen Ratings), the domain yahoo.com attracted at least 1.575 billion visitors annually by 2008. The global network of Yahoo! websites receives 3.4 billion page views per day on average as of October 2007. It is the second most visited website in the U.S., and the most visited website in the world.

* We usually link to a company’s own description of its business on its website. We didn’t for YHOO because we couldn’t find on its website a concise description of the company or its business. While this may speak more to our own ineptitude, it might also be a telling sign for a “leading global Internet brand” that has struggled lately, no?

The value proposition

Before we launch into our analysis of YHOO, we have to state up front that Greenbackd’s focus is on undervalued asset situations, and preferably undervalued tangible assets. One would think that with YHOO, a “leading global Internet brand”, one would find a great deal of value in its intangible assets. Our bias for tangible over intangible assets will almost certainly lead us to a lower valuation for YHOO than another investor with a preference for intangible assets which generate earnings or cash flow.

Set out below is our summary analysis (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):

yhoo-summary

Ordinarily, when we discount a company’s assets we get a much lower liquidating value than carrying value. In YHOO’s case, most of the tangible asset value is in the Cash and Short Term Investments which we don’t write down ($3.2B or $2.32 per share) and Long Term Investments (carried at $3.2B or $2.31 per share), which we’ve only written down to $3B or $2.19 per share for reasons we’ll explain below. We’ve written down the Property, Plant and Equipment by 85%, but it only represents a small proportion of the total tangible assets and so doesn’t have a meaningful impact on the valuation. Our usual liquidation valuation – the Armageddon scenario – for YHOO is $5.4B or $3.91 per share.

We believe that the Armageddon scenario substantially undervalues YHOO because it excludes the Goodwill in the Investments in Equity Interests (which is included in the Long Term Investments above). Including the Goodwill, YHOO’s Investments in Equity Interests amount to the following:

  • a 44% equity interest in Alibaba Group valued at $2.2B
  • a 1% equity interest in Alibaba.com Limited valued at $52M and
  • a 33% equity interest in Yahoo! Japan valued at $6B.

Including the Goodwill figures in the Investments in Equity Interests above (but deducting the Deferred Income Tax) gives us an asset valuation for YHOO closer to $9.5B or $6.82 per share.

Icahn said in an interview with CNBC last Wednesday that he believes YHOO is undervalued and that he “opposes breaking up the company in a piecemeal sale” (NY Times’ Dealbook has the transcript). While we can only speculate as to Icahn’s investment thesis for YHOO, that statement leads us to believe he is valuing it on an earnings or cash flow basis. YHOO’s Cash from Operating Activities is impressive at $1.9B in 2007 and $347M in the most recent quarter to September. Even more impressive is that it achieved that operating cash flow on only $9.5B of equity (up from $9.1B in the prior year), which means it returned around 21% on average equity. We’ve got no idea about the future economics of YHOO’s businesses or the industry as a whole, so we can’t predict whether YHOO can continue to generate these types of returns and we won’t be speculating as to its value on an earnings or cash flow basis.

The catalyst

Icahn, who currently sits on the board and holds 5.5% of the company, will be the driving force in any deal involving YHOO. His decisions will likely be informed by the fact that he has paid an average of $23.59 per share to accumulate a 5.5 percent stake (according to this filing with the SEC). There are a number of suitors seeking to consummate a marriage with YHOO. This Wall Street Journal article (subscription required) suggests former AOL chief Jonathan Miller is talking to investors about raising money to purchase all or part of YHOO. Icahn has said that he would be opposed to a partial bid “even at a premium.” He also expressed doubts about Miller’s ability to raise the money but would be willing to listen if Miller made a “bid at a very high price”. Another possibility is Microsoft, which has recently engaged a former YHOO search and advertising executive, but Microsoft CEO Steve Ballmer told the Wall Street Journal Thursday (subscription required) that there were no talks to acquire YHOO’s search business.

Icahn has a long history of succesful activist investment, with recent high profile campaigns against  Blockbuster, Imclone, XO Communications, Mylan Laboratories and Time Warner. According to this 2007 Fortune profile, he is renowned for taking on the biggest targets while generating exceptional returns:

In its less-than-three-year existence, Icahn Partners has posted annualized gains of 40%, investors told Fortune. After fees, the investors pocketed 28%. That 40% gain trounces the S&P 500’s return of around 13%, as well as the 12% for all hedge funds calculated by research firm HedgeFund.net. Icahn Partners boasts a string of big wins in short periods. The acquisition of energy producer Kerr-McGee gave the fund a $300 million gain, or a 100% return in just nine months. Icahn Partners achieved gains of $100 million and $230 million, respectively, both in less than three months, on forcing the sales of Fairmont Hotels & Resorts and drugmaker MedImmune.

The same Fortune article suggests that Icahn’s biggest strength is his knack for picking targets:

His skill at prospecting is so well honed that in most cases he’s destined to make money from the day he buys the shares. Then it’s a matter of squeezing management to sweeten the inevitable gains.

This is high praise indeed. Given that Icahn has paid an average of $23.59 per share for YHOO, he clearly sees value well in excess of that number and will be agitating for it to be realised.

Conclusion

YHOO is not cheap on any theory of value we care to employ. It is trading at a substantial premium to its asset backing, which means the market is still generously valuing its future earnings. It is generating substantial operating cash flow and earnings, which in a better market might be worth more, but it’s not obviously cheap to us.

The best thing about YHOO from our perspective is the presence of Carl Icahn on the register. His holdings were purchased at much higher prices than are presently available and he is unlikely to sit idly by while the stock stagnates.

Buying YHOO at these prices is a bet that Icahn can engineer a deal for the company. Given his legendary status as an activist investor earned through canny acquisitions over many years, we think that’s a good bet. But a bet is what it is – it’s speculation and not investment. If speculation is your game, then we wish you the best of luck but know that the price might fall a long way if he sells out. If you’re an investor, the price is too high.

YHOO closed Friday at $11.66 and the S&P 500 Index closed at 876.07.

[Disclosure: We do not have a holding in YHOO. 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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List of activist investments for November

Posted in Activist Investors, Autobytel (NASDAQ:ABTL), Avigen (NASDAQ:AVGN), Biotechnology Value Fund, Cannell Capital, Carl Icahn, InFocus Corporation (NASDAQ:INFS), Lloyd I. Miller III, Nery Capital Partners, Net Cash Stocks, Net Net Stocks, Stocks, Yahoo! (NASDAQ:YHOO), Zale Corporation (NYSE:ZLC), tagged , , , , , , , , , , on December 5, 2008| Leave a Comment »

The Official Activist Investing Blog has published its list of activist investments for November:

Ticker Company Activist Investor
ABTL Autobytel Inc Trilogy Inc
ACF AmeriCredit Corp Fairholme Capital Management
ACTL Actel Corp Ramius Capital
ADPT Adaptec, Inc Steel Partners
ARCW Arc Wireless Solutions Brean Murray Carret Group
ATSG Air Transport Services Group Perella Weinberg Partners
AVGN Avigen Inc Biotechnology Value Fund
BBI Blockbuster Inc Marlin Sams Fund
BEE Strategic Hotels & Resorts Security Capital Research & Management
BITI Bio-Imaging Technologies Healthinvest Partners
CHG CH Energy Group Inc Gamco Investors
CHIC Charlotte Russe Holding Inc KarpReilly Capital Management
CPN Calpine Corp Harbinger Capital
CRXX CombinatoRX, Incorporated Biotechnology Value Fund
CTO Consolidated Tomoka Land Co Wintergreen Advisers
CWLZ Cowlitz Bancorporation Crescent Capital
DBD Diebold Inc Gamco Investors
DCAP DCAP Group Infinity Capital Partners
DVD Dover Motorsports Mario Cibelli
ENTU Entrust Inc. Empire Capital Partners
FACE Physicians Formula Holdings, Inc Mill Road Capital
FSCI Fisher Communications Gamco Investors
FTAR.OB Footstar Inc Schultze Asset Management
GBE Grubb & Ellis Company Anthony Thompson
GGP General Growth Properties Pershing Square Capital
GSLA GS Financial Corp FJ Capital Long/Short Equity Fund
HCBK Hudson City Bancorp Gamco Investors
HFFC HF Financial Corp PL Capital
INFS Infocus Corp Nery Capital Partners
INFS Infocus Corp Lloyd Miller
ISH International Shipholding Corp Liberty Shipping Group
KANA.OB Kana Software KVO Capital Management
KEYN Keynote Systems Ramius Capital
KFS Kingsway Financial Services Joseph Stilwell
KONA Kona Grill Mill Road Capital
LCAV LCA-Vision Inc Stephen Joffe
LDIS Leadis Technology Inc Kettle Hill Capital Management
LNET LodgeNet Interactive Corporation Mark Cuban
LTM Life Time Fitness Green Equity Investors
MCGC MCG Capital Corporation Springbok Capital Management
MGAM Multimedia Games Inc. Dolphin Limited Partnership
MGI Moneygram Interntaional Inc Blum Capital
MIM MI Developments Greenlight Capital
MYE Myers Industries Inc Gamco Investors
NAV Navistar International Owl Creek
NLS Nautilus Inc Sherborne Investors
NOOF New Frontier Media Steel Partners
NYT New York Times Harbinger Capital
OEH Orient-Express Hotels SAC Capital; DE Shaw
ORNG Orange 21 Costa Brava
PBIP Prudential Bancorp Inc. of PA Joseph Stilwell
PGRI.OB Platinum Energy Resources Inc Syd Ghermezian
PHH PHH Corp. Pennant Capital Management
PNNW Pennichuck Corp Gamco Investors
PPCO Penwest Pharmaceuticals Co Perceptive Advisors
PRXI Premier Exhibitions, Inc Sellers Capital
PWER Power One Bel Fuse
PXG Phoenix Footwear Group Reidman Corp
RDEN Elizabeth Arden Shamrock Activist Value Fund
SCOP Scopus Video Networks Ltd. Optibase Ltd
SECX.PK SED International Holdings Hummingbird Management
SLTC Selectica Inc Trilogy Inc (Versata Enterprises)
SNG Canadian Superior Energy Palo Alto Investors
SNSTA Sonesta International Hotels Gamco
SUAI Specialty Underwriters Alliance Philip Stephenson
SUMT SumTotal Systems Discovery Capital
SUTM.OB Sun-Times Media Group Inc. K Capital
SUTM.OB Sun-Times Media Group Inc. Davidson Kempner Partners
SWWI Simon Worldwide Inc Everst Special Situations Fund
TIKRF.OB Tikcro Technologies Ltd Steven Bronson
TXCC TranSwitch Corp Brener International Group
TXI Texas Industries Shamrock Activist Value Fund
UIS Unisys Corp MMI Investments
UTEK Ultratech Inc Temujin Fund
WBSN Websense Inc Shamrock Activist Value Fund
WEDC White Electronic Designs Wynnefield Capital
WINS SM&A Mill Road Capital
YHOO Yahoo Carl Icahn
ZLC Zale Corp. Breeden Capital Management

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Net Net vs Activist Legend

Posted in Activist Investors, Carl Icahn, Dataram Corporation (NASDAQ:DRAM), Stocks, Yahoo! (NASDAQ:YHOO) on December 4, 2008| 3 Comments »

Greenbackd’s ideal investment opportunity is a deeply undervalued asset situation with a catalyst to quickly remove the discount. Unfortunately, those opportunities are few and far between.

We frequently find deeply undervalued asset situations with no obvious catalyst. We also often find activists in stocks that we woud not consider to be undervalued on an asset basis.

As a thought experiment, we thought that we would compare the performance of two stocks: one a net net and net cash stock lacking a catalyst, and the other a stock not obviously undervalued on an asset basis but nonetheless pursued by an activist investor.

We’ve selected Dataram Corporation (NASDAQ:DRAM) as representative of the net-nets. DRAM is a classic net-net stock, with a $10.5M market cap and around $19.4M of value in liquidation, including $16M in cash.

The second stock selects itself: Yahoo! Inc. (NASDAQ:YHOO), one of the original Internet stocks, has as one of its largest stockholders activist investing legend Carl Icahn and the NY Times speculates that it has a potential suitor. YHOO has a market cap of around $15.9B and tangible assets of around $5.5B, including around $3.2B in cash, which means it is not undervalued on an asset basis.

Today, we examine DRAM and on Monday we will examine YHOO.

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