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Yesterday I ran a guest post on the short case for Berkshire Hathaway Inc. (NYSE:BRK.A, BRK.B) by S. Raj Rajagopal, an MBA student at Johnson Graduate School of Management at Cornell University. The post generated several requests for the valuation supporting Raj’s short thesis, which Raj has provided and I’ve reproduced below.

Here is the valuation underpinning Raj’s short case for Berkshire Hathaway Inc. (NYSE:BRK.A,BRK.B):

(Click to enlarge)

Click here to download the full presentation including the updated valuation for the Berkshire Hathaway short case (.pdf).

Please contact Raj if you would like to discuss his valuation or his short case.

[Full Disclosure: I do not hold a position in BRK.A or BRK.B. 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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S. Raj Rajagopal has provided a guest post outlining his argument for a short position in Berkshire Hathaway Inc. (NYSE:BRK.A, BRK.B). Raj is an MBA student at Johnson Graduate School of Management at Cornell University graduating in May this year. He has worked as a portfolio manager at the Cayuga Fund, LLC, the Johnson Graduate School’s $12M hedge fund, and is currently seeking full-time employment in the investment management area. Here is his resume and his website, Gordian Knots. Please contact Raj if you would like to see his valuation on BRK.A / BRK.B.

Raj’s short case for Berkshire Hathaway Inc. (NYSE:BRK.A,BRK.B) is set out below:

(Click to enlarge)

Click here to download the Short Case for Berkshire Hathaway in full (.pdf)

[Full Disclosure: I do not hold BRK.A or BRK.B. 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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Genaera Corporation (NASDAQ:GENR) is a first for us: a short play. The company has announced that the board of directors has approved a Plan of Liquidation and Dissolution forecasting distributions of between $0.002 and $0.0173 per share contingent on a sale of its assets. We believe the most likely outcome to be a distribution of nil. The stock is currently at $0.18. The risk to the short position is a sale of the company’s intellectual property, which we think is unlikely for the reasons we describe below.

About GENR

GENR is a biopharmaceutical company focused on advancing the science and treatment of metabolic diseases. It has announced a plan to liquidate:

Genaera Corporation Announces Approval of Plan of Liquidation and Dissolution by Board of Directors

Plymouth Meeting, PA – April 28, 2009 – Genaera Corporation (the “Company”)(NASDAQ: GENR) today announced that its Board of Directors has determined, after extensive and careful consideration of the Company’s strategic alternatives, that it is in the best interests of the Company and its stockholders to liquidate the Company’s assets and to dissolve the Company. The Company’s Board of Directors has approved a Plan of Complete Liquidation and Dissolution of the Company (the “Plan of Dissolution”), subject to stockholder approval. The Company intends to hold a special meeting of stockholders to seek approval of the Plan of Dissolution and has filed preliminary proxy materials with the Securities and Exchange Commission (“SEC”) and will file definitive proxy materials in the near future.

The Plan of Dissolution contemplates an orderly wind down of the Company’s business and operations. If the Company’s stockholders approve the Plan of Dissolution, the Company intends to file articles of dissolution, satisfy or resolve its remaining liabilities and obligations, including but not limited to contingent liabilities and claims, lease obligations, severance for terminated employees and costs associated with the liquidation and dissolution, and attempt to convert all of its remaining assets into cash or cash equivalents. Based on current projections of operating expenses and liquidation costs the Company currently estimates that it will not make liquidating distributions to stockholders unless and until a sale of one or all of its assets has been consummated. Following stockholder approval of the Plan of Dissolution and the filing of articles of dissolution, the Company would delist its common stock from NASDAQ.

If, prior to its dissolution, the Company receives an offer for a corporate transaction that will, in the view of the Board of Directors, provide superior value to stockholders than the value of the estimated distributions under the Plan of Dissolution, taking into account all factors that could affect valuation, including timing and certainty of closing, credit market risks, proposed terms and other factors, the Plan of Dissolution could be abandoned in favor of such a transaction.

The value proposition

GENR has funded its operations primarily from the proceeds of public and private placements of its securities and through contract and grant revenues, research and development expense reimbursements, the sale of a Pennsylvania research and development tax credit carry forwards and interest income. It has not nor will it ever have products available for sale and has incurred losses since inception.

The notice of special meeting filed yesterday anticipates a maximum distribution of $0.0173 per share and the company does not expect to make a distribution “unless and until a sale of one or all of our assets has been consummated.” The balance sheet as at March 31, 2009 shows $5.3M in cash and equivalents less $2M in liabilities, which equates to a net cash value of $3.3M or $0.19 per share before we deduct the following:

  • ongoing operating expenses;
  • expenses incurred in connection with extending directors’and officers’ insurance coverage;
  • expenses incurred in connection with the liquidation and dissolution process;
  • severance and related costs; and
  • professional, legal, consulting and accounting fees.

Assuming between $3M and $4M for the foregoing, GENR has between $0.02 per share and nil net cash value in liquidation, with nil being more likely.

The company’s own estimates are as follows:

Based on our current projections of operating expenses and liquidation costs, we currently estimate that distributions to stockholders would only occur in the event of a consummation of the sale of one or more of our assets:

genr-summary

(1) Estimated salaries and related benefits for employees through May 31, 2009.
(2) Represents final research and development expenses related to the wind down of our trodusquemine program, including clinical trial costs, third-party contract research costs and manufacturing expenses.
(3) Other operating expenses consists of facilities expenses, legal, accounting and intellectual property expenses, consulting and other fees and insurance costs including the payment of $255,000 for directors and officers liability insurance covering six years from the date of stockholder approval of the Plan of Dissolution.
(4) Estimated cash use for severance payments to employees remaining after March 31, 2009, including Executive Officers. Amounts included in the table for Executive Officers do not include amounts due under the Executive Officers and Dr. Wolfe’s change of control agreements. See “Interests of Certain Directors and Executive Officers in Approval of the Plan of Dissolution – Summary of Benefits of Certain Executive Officers” for additional information related to severance payments to the Executive Officers. The severance costs shown in the table include $1,012,000 to be paid to the Executive Officers, $516,000 to be paid to other employees, $95,000 of associated payroll taxes and $42,000 for ongoing health benefits under employee severance agreements for all employees.

The risk to this analysis is the company actually manages to sell its intellectual property assets, and we’re going to explore GENR’s efforts to sell those assets in some detail below.

Likelihood of asset sales

According to the proxy statement for the special meeting, GENR has made extensive efforts to sell or license its intellectual property without success since 2008. Throughout 2008 management contacted over 90 prospective strategic partners, both domestic and international. This resulted in approximately 25 companies signing non-disclosure agreements and receiving non-public evaluation materials. Subsequently, two parties submitted expressions of interest in the purchase of two separate assets.

GENR and its legal advisors have been engaged in discussions with one prospective purchaser in an attempt to reach an agreement regarding the acquisition price and the other terms of a definitive agreement. According to GENR, the parties are generally in agreement on the proposed terms of a definitive agreement and continue to communicate, but have been unable to complete the transaction. With regard to the second potential purchaser, GENR is currently engaged in discussions in an attempt to reach an agreement regarding the acquisition price of the other asset.

In 2009, as a result of limited interest in GENR’s other assets and the unanticipated delay in the consummation of the transaction, GENR engaged of outside parties to assist in licensing and/or partnering its trodusquemine program. The scope of the oustide engagement included searching for a purchaser, licensee or partner acceptable to GENR and assisting it in negotiating the financial aspects of a transaction.

Between January and March 2009, the oustide parties contacted 43 potential purchasers and/or partners, which resulted in 23 rejections, 9 pending reviews and the execution of 11 non-disclosure agreements to review non-public evaluation materials. The review of confidential information resulted in six rejections and meaningful discussions with three potential licensors and/or purchasers.

At the April 8, 2009 meeting of the board, the board reviewed the prospects for partnering and/or licensing the trodusquemine program, the status of the sales of two of its assets, as well as alternative means to fund the company. As neither of the asset sales had been consummated or were projected to be consummated imminently, the board instructed management to prepare a plan of dissolution in conjunction with the outside counsel for review and consideration at the next board meeting.

Conclusion

GENR is a short play because the current stock price is almost ten times the company’s projected distribution in the liquidation of the company. The stock is currently at $0.18. The company forecasts distributions of between $0.002 and $0.0173 per share contingent on a sale of its assets. We believe there is a very real possibility the distribution could be nil.  The risk to the short position is a sale of the company’s intellectual property, which we think is unlikely.

Hat tip Anon.

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