Saturday, July 4, 2009 5 comments ++[ CLICK TO COMMENT ]++

Mathstar shareholders to vote on liquidation

Mathstar has its annual meeting on July 10th, after the original date was delayed. In the proxy statement Mathstar recommended that shareholders vote against a proposal (proposal #3 in the proxy) by shareholder Joe Gensor to liquidate the firm. I was wondering why Mathstar was suggesting a vote against liquidation and it seems that they are confident that they could pull off a merger with another firm or purchase assets and start up the firm again. In their June 12th, 2009, filing recommending shareholders vote against the takeover attempt by Tiberius, they mention the following:

The Board is considering a potential merger with a privately-held company that meets many of the criteria the Board set forth earlier regarding potential strategic transactions. The privately-held company could productively use additional cash for expansion.

The Company's Board is also considering a restart of the Company's operations based upon an opportunity to acquire and commercialize new technology closely related to the core video applications previously developed by the Company. This approach could potentially be less dilutive to the Company's current stockholders while preserving and using the Company's NOLs.


I think the second choice is terrible for shareholders. We have already seen how the company burned through millions over the years and produced no viable product. Trying to re-start with new technology acquisitions is likely to fail again, especialy given how Mathstar doesn't have much cash.


The first option is interesting, especially given how Mathstar has $140 million of NOLs. If the NOLs can be utilized, by buying out a profitable firm, it has the potential to unlock massive shareholder value. Unfortunately, I don't think this is a viable strategy for Mathstar. The problem is that the company is too small. It only has around $12 million to use in acquisitions. Even if you somehow get some additional financing (either through debt, bank loan, or issuing a ton of shares) it will barely be enough to purchase a decent company. Mathstar has alluded to the difficulties in their filing, pointing out the difficulty of maintaining majority ownership of any purchased entity, in order to preserve the NOLs. I mentioned Clarus a few days ago but that has $80m in cash, which is enough to purchase a sizeable company.

So, I think Mathstar will likely fail to acquire any decent company. Even if it were to acquire one, given the small amount of cash available, it can easily burn through that and end up bankrupt. Therefore, I think Mathstar should liquidate the firm. I voted FOR on the thir proxy choice, favouring liquidation of the firm. Given how some of the activist investors are in favour of liquidation, it remains to be seen what the result will be.

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5 Response to Mathstar shareholders to vote on liquidation

Daniel M. Ryan
July 5, 2009 at 3:23 AM

Almost $1.50 in net cash per share is a good incentive to liquidate, given the current price of the stock. No wonder Tiberius Capital II's tender offer is being extended.

This is the first time I've seen a stock selling for well below is net cash per share. Thanks for sharing it.

Sivaram
July 5, 2009 at 8:51 PM

If you are interested in these types of situations, do check out the following blogs (especially Greenbackd):

Greenbackd
ValueHuntr
Cheap Stocks
ShadowStock

Credit for this idea should go to Greenbackd.

Anyway, be careful wtih these situations. Just because it is trading below cash doesn't mean that management won't do something stupid and destroy shareholder wealth. I believe the risk here is low because the company has terminated operations and there are only two employees, but, in general, many companies with similar metrics may be burning through cash and management may not curb their cash burn.

Daniel M. Ryan
July 5, 2009 at 10:24 PM

Thanks for the links; I've added the ones I don't already have to my blogroll.

As for me going in myself, I'm not in a position to right now. Still, your words are wise. I've watched mining exploration stocks off and on, and have not been fooled by any below-net-cash companies in that sector. To be frank, any exploration company that sat on its hoard would attract the ire of shareholders wanting a little good news this exploration season.

But then again, exploration-juniors is one of the few sectors where some dilution is considered, on balance, a good thing. "Better to have 50% of something" is the unwritten operating rule.   

Sivaram
July 5, 2009 at 11:00 PM

It's interesting that you brought up the junior mining companies because a similar thing can probably be said of those biotech and pharmaceutical research companies. Some commentators at sites like Greenbackd invest in those companies but I am very wary of them. Similar to the mining companies, I think shareholders expect pharmaceuticals/biotechs/etc to spend their cash hoard trying to research and develop a product. One should be careful with them, like the mining firms, if they look at cash on the balance sheet.

Daniel M. Ryan
July 7, 2009 at 12:09 AM

Stock Pursuit has picked up on MATH.
http://www.stockpursuit.com/2009/07/net-cash-stock-math-special-situation.html

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