Shell/blank check companies

[Ballinvarosig Investors]

I often see many value investors parking part of their portfolio in these sort of companies. On paper, they look like cigar butts, with stock prices often below the cash on the balance sheet and NOL's being ignored. However, in reality these companies seem to go nowhere for even decades on end, by which time the cash on the balance sheet has been flittered away.

 

One stock I have followed is Clarus Corp. This is one example of a company that has seemed to have been around for years now, without actually using the cash on the balance sheet to make an acquistion. Each quarter Warren Kanders (the CEO) delays, the cash on balance just gets smaller and smaller and smaller.

 

An even worse example is Ambase Corp. These guys have been a shell company for ten years now and seem happily content to pay themselves nice salaries, employ PA's and maintain a corporate HQ. It's madness that management ignore their fiduciary duty, but even crazier that shareholders don't vote them out!

 

There are quite a few similar stocks that have done similar things over the years, and from what I can see, with disappointing results.

 

Bexil

Cadus

 

Has anyone any thoughts on these kind of set-up's? Am I missing something?

[Myth465]

We have talked about Clarus a few times on the board and it has been written up on VIC a number of times. I am a small (auctually) very small investor running my own cash. I see 10 - 20 stocks which I think are bargains on a FCF basis. These stocks all go up at some point and seem to go up rapidly (ATSG, FUR, WMAR) so I would rather park cash in these companies then wait for the blank check companies.

 

On the flip side they seem to work out well and REN is one of newer investments which was a reverse merger type going public blank check company sort of thing. From what I have seen they usually work out, I just have issues with the time value of money aspect of it all. Given my size I cant force anything and if I could and had access to management then I would consider such things. The valuations on these are a no brainier and a board seat / access to management to analyze their intentions would make these easy investments to make.

 

Without that you are just investing and hoping inmo.

[Myth465]

Thanks for the additional color. I thought he had a decent record but, it seems like he is definitely great at running things once they get going.

[ragnarisapirate]

Thanks for the idea. Has anyone read the related party transactions for Clarus? It is pretty long, when compared to others... Not saying that it is a big deal, as I kind of view it as a fee to get a decent manager, but, it certainly seems to come at a price. Fortunately, there isn't a woolly mammoth skull like at Life Partners ;D

 

To throw out some contrary info on the 'transaction is coming' theory: "During the quarter ended September 30, 2008, the Company incurred charges of approximately $14,000 for payments to Kanders Aviation LLC. " There have been no such expenses since. Granted, accounting expenses are a bit more of a smoking gun than air travel, and they may very well be related.

 

Certainly, the move out of marketable securities is interesting... maybe out of t-bills and into some short run CDs?

 

All things equal, it does seem cheap. I do wonder what kind of acquisition they will be able to make, especially if there is a downturn in equity/real estate/business prices around the corner.

 

Just some thoughts.

[ragnarisapirate]

Question: do you think that over 800K/quarter in SG&A seem like a lot for 11 employees? obviously, they are working on getting the number down, but still... Are they just retaining brilliant people for the running of whatever company that they take over?

 

Also, do you know what the remaining marketable securities are made up of? From your impression of management, could they be using them to build a stake in some public company, and then tender for the rest of it?

[Ballinvarosig Investors]

Thanks for the write-up on Clarus, valuegeek.

 

I know Kanders has had a great record with Armor Holdings; however, he has most recently blotted his copybook with his disastrous investment in the now bankrupt Stamford Industrial Group. I'm still not too convinced on the notion of investing in what is essentially an IPO. When Clarus do make an acquisition, they will probably end up overpaying. Not only that, but history shows us that IPO and these type of acquisitions will initially tend to disappoint. I just can't help but feel that you could get a better price after the acquisition is made.

[ragnarisapirate]

eeek:

 

from the most recent Clarus 10K http://www.sec.gov/Archives/edgar/data/913277/000114420410013483/v176976_10k.htm

 

TRANSACTION EXPENSE

 

During the year ended December 31, 2009, the Company recognized $1.6 million in transaction expenses arising out of a significant negotiation and due diligence review of a proposed transaction relating to the Company’s redeployment strategy, which involved an acquisition of several major assets and a financing component, that terminated without consummation.  The transaction expenses include legal, accounting and other professional fees incurred for due diligence, and preparation and negotiation of documentation.

 

I may be off base here, but does anyone think that it would be an interesting idea for SNS to merge with or buy Clarus?

[valuecfa]

eeek:

 

I may be off base here, but does anyone think that it would be an interesting idea for SNS to merge with or buy Clarus?

 

What would be the point? They would lose much of their NOLs. If i were a shareholder I would rather see the company do a cheap acquisition insead.

[Myth465]

that's definitely good news and makes one want to buy shares.

[ragnarisapirate]

Valuecfa: after thinking and reading more about the acquisition of NOLs, it does seem like there would be little point for CLRS shareholders. I am still trying to think of a transaction where there might be benefit for both companies... maybe them forming some sort of joint venture where CLRS owns 80% and SNS owns 20%? How would the accounting with that work?

 

Myth: the transaction "terminated without consummation"... so, unless I am mis-reading something (which I am prone to do :]), they are out 1.6 million bucks, and are still looking for a way to deploy cash.

[valuecfa]

Valuecfa: after thinking and reading more about the acquisition of NOLs, it does seem like there would be little point for CLRS shareholders. I am still trying to think of a transaction where there might be benefit for both companies... maybe them forming some sort of joint venture where CLRS owns 80% and SNS owns 20%? How would the accounting with that work?

 

A joint venture would work okay for Clarus. Their NOLs would only help them though (in proportion to their ownership in the JV), and not the other party involved in the venture (like SNS). The best thing for Clarus is to buy a good, immediately profitable company on the cheap, and soon. They have the cash to make the NOLs worthwhile. I remember looking at Clarus a few months ago, and then putting them on the shelf, and forgot about it. I can't remember the expiration schedule off-hand, but if the majority is fairly far out, then this is the type of company that could get a lot of value out of their NOLs.

 

Edit: Out of curiosity I just check to see if they at least have the good sense to protect their NOLs, and they do. Of the approximately $228 million of net operating losses available to offset taxable income, approximately $211.9 million does not begin to expire until 2020 or later. So they have plenty of time, so long as they don't cash burn in the meantime (or make an overvalued acquisition).

 

 

 

[jasonw1]

Another idea to consider is ENZN

 

Total market cap of $455m

$500m cash - $134m debt + royalty business + pipeline

royalty business is probably worth ~250m

and you get the pipeline for free, which could be worth another couple of hundred $m

 

The catalyst is you have Baupost and Icahn as big stakeholders pushing for change, just sold the manufacture business for $300m and ousted the CEO

 

This could be a similar liquidation/sellout play like FACT

 

[valuecfa]

If you wanna see a funny case check out Cosine Comm. About $600 million in fed & state NOLs, and a $19 million market cap. lol

 

 

edit: I should note that i don't really think it is a good investment. I just thought that it was kinda interesting for this company to have that much nols and such a small company.

[Myth465]

the cash is gone but it shows management is actually seriously looking.

[motownsf]

SWKH has over $400mm NOLS and $37m market cap.