Hielko Posted June 19, 2014 Share Posted June 19, 2014 Unfortunately, I haven't. Furthermore, we should get a better gauge at what level of actual ownership or ownership change the company's NOLs are in jeopardy, because I don't believe that the 15% - the poison pill level - is that level. The IRS is using a pretty complex system to determine that, see http://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=1005&context=tax for more details. I do think that the company needs to be careful about the NOLs because there is a 3-year testing period and if there is a more than a 50% ownership change in that period the NOls could be invalidated. You, Swenson, James and Ancora are already good for ~32 percentage points the past three years I think. Two additional 10% owners and the 50 percentage point threshold is breached (at least that is how I'm understanding things, not an expert in these things). PS. Based on the trading volume it's my guess that John Stayduhar. Plenty of volume the past few days to liquidate his whole stake, and he had the biggest stake of all. But I guess we will find out soon enough. Link to comment Share on other sites More sharing options...
gg Posted June 19, 2014 Share Posted June 19, 2014 Thanks thepupil. I was getting similar #s after going through the filings. Anyone involved here know of any larger holders who have not filed? Unfortunately, I haven't. Furthermore, we should get a better gauge at what level of actual ownership or ownership change the company's NOLs are in jeopardy, because I don't believe that the 15% - the poison pill level - is that level. Have you spent any time looking into this issue? Seems pretty important, and from what I can tell, a significant/majority source of the potential value beyond current trading levels. Link to comment Share on other sites More sharing options...
valueyoda Posted June 19, 2014 Share Posted June 19, 2014 That is partially why I limited my stake to 10% to avoid breaching that NOL trigger level. This is such a valuable off balance asset that would simply go away by either paying a dividend, repurchasing shares or simply operating the company as-is without further actions. Link to comment Share on other sites More sharing options...
Hielko Posted June 19, 2014 Share Posted June 19, 2014 About the NOLs: I was trying to check some things, but I realized I have no idea how SODI generated those NOLs in the first place. In the 1997 annual report they write that they had $10 million in loss carry forwards that expire through 2010. Since that date the have generated positive net income in every year except 2002 when they posted a small loss. So how do they manage to have $14 million in NOLs anno 2014? Link to comment Share on other sites More sharing options...
NeverLoseMoney Posted June 20, 2014 Share Posted June 20, 2014 Swenson sold: http://www.sec.gov/Archives/edgar/data/91668/000089706914000314/cg420.htm I was hoping for a scenario like PDEX, where Swenson was also involved and ultimately an investment committee was established that was responsible for capital allocation. Looks like that possibility is gone now for SODI. Perhaps one of the other large holders will become active at some point. There has been some progress (annual meeting, small dividend), but if a successful activist like Swenson throws in the towel I do begin to worry whether more can be achieved. Link to comment Share on other sites More sharing options...
writser Posted June 20, 2014 Share Posted June 20, 2014 So, who's stepping up now? :) Interesting point about the NOL's. Looks like they generate more of them even during profitable years. I have no clue about the specifics. Link to comment Share on other sites More sharing options...
valueyoda Posted June 20, 2014 Share Posted June 20, 2014 Sad to see Swenson go, but I am definitely holding on for quite some time to come. And I might even consider upping my stake in the near term. Link to comment Share on other sites More sharing options...
gg Posted June 21, 2014 Share Posted June 21, 2014 Sad to see Swenson go, but I am definitely holding on for quite some time to come. And I might even consider upping my stake in the near term. valueyoda/jschembs - would either of you be willing to share some of your thinking regarding what you think this company is worth if taken private? I've looked at it just a little bit since these recent ownership filings, but aside from possible value of NOLs, which I always find difficult to evaluate and often over-emphasized, I'm not seeing some tremendous value beyond the trading price. Basically, with real back of the envelope calculations, taking the cash at fair value (~$6 million) plus 5-7x ebitda (getting ebitda of ~$1.1 million), I yield a VERY rough fair value of around $11-14 million. Versus a market cap of $9 million and change, doesn't seems like some unbelievable value at first glance. Just to be clear, I am not suggesting the above 'analysis' is in any way correct - simply a back of the envelope numbers -- and I am only writing this to start the valuation conversation, and hopefully hear your thoughts. Curious if there is a major source of value that I'm overlooking, or if maybe you think the operations are worth significantly more than my 5-7x estimate Link to comment Share on other sites More sharing options...
valueyoda Posted June 21, 2014 Share Posted June 21, 2014 The future value of this company is path-dependent as it relies on how the NOLs are utilized over the coming years. If the company remains resistant to any value creation aside from running the core business, then I agree with you that there is only 25% upside (a little more over time as free cash flow is generated). On the other hand, I do think from an investment perspective there is very little downside at these levels, reasonable upside and great optionality that could be very valuable if we can transform the company. I do want to add a few additional notes. Since I bought the vast majority of my stake after the record date, I won't be able to vote most of my shares according to my preferences. However, since Swenson was the selling shareholder, I am sure that he will vote against certain proposals. Secondly, I still have the opportunity to buy 5% without triggering the poison pill, which I will probably exercise. I will become restricted by insider trading rules when I cross the 10% ownership mark, so at that point I have to limit my reporting on this position. Link to comment Share on other sites More sharing options...
jschembs Posted June 21, 2014 Share Posted June 21, 2014 The future value of this company is path-dependent as it relies on how the NOLs are utilized over the coming years. If the company remains resistant to any value creation aside from running the core business, then I agree with you that there is only 25% upside (a little more over time as free cash flow is generated). On the other hand, I do think from an investment perspective there is very little downside at these levels, reasonable upside and great optionality that could be very valuable if we can transform the company. I do want to add a few additional notes. Since I bought the vast majority of my stake after the record date, I won't be able to vote most of my shares according to my preferences. However, since Swenson was the selling shareholder, I am sure that he will vote against certain proposals. Secondly, I still have the opportunity to buy 5% without triggering the poison pill, which I will probably exercise. I will become restricted by insider trading rules when I cross the 10% ownership mark, so at that point I have to limit my reporting on this position. In general I agree with gg's value conclusions and Willem's comments above. I think there is tremendous opportunity in utilizing both the current cash pile and future free cash, in concert with the NOLs, to grow this investment substantially over time. We need to find an effective way to engage Shevach in dialogue and end this antagonism. Easier said than done, I understand, but I do not doubt that Shevach has a great deal of pride in this company, and obviously has significant personal net worth in the equity, so I hold out some hope we can make inroads. Link to comment Share on other sites More sharing options...
valueyoda Posted June 21, 2014 Share Posted June 21, 2014 I fully agree with Jay. Shevach has run this company for decades and given his ownership, he sees it as his company and his legacy. To him, we are barbarians at the gate, a noisance that he had to deal with for the last few years. Therefore, it is necessary to have continuing dialogue with him to make sure that he sees that our proposals are complimentary to his strategy and beneficial to future shareholder value creation (including for his family). Link to comment Share on other sites More sharing options...
gg Posted June 21, 2014 Share Posted June 21, 2014 Maybe I'm not too creative, but I don't see a much better scenario than the operations being sold to a synergistic buyer for 7x ebitda, and then all the proceeds + cash being returned to shareholders. That would end with maybe a 30% upside after paying closing and wind down expenses. Not necessarily a bad scenario due to its seemingly finite downside risk, but still no home run. Is anyone familiar with the technology, and know if there is a larger untapped market for their products? Is there a chance that Saraf is a good operations guy, but with a new sales focus, they could double or triple revenues? I'm just trying to understand the true bull case scenario... Link to comment Share on other sites More sharing options...
Hielko Posted June 22, 2014 Share Posted June 22, 2014 Is anyone familiar with the technology, and know if there is a larger untapped market for their products? Is there a chance that Saraf is a good operations guy, but with a new sales focus, they could double or triple revenues? I'm just trying to understand the true bull case scenario... I don't think anybody is thinking that is a realistic scenario. Link to comment Share on other sites More sharing options...
LC Posted June 22, 2014 Share Posted June 22, 2014 Is anyone familiar with the technology, and know if there is a larger untapped market for their products? Is there a chance that Saraf is a good operations guy, but with a new sales focus, they could double or triple revenues? I'm just trying to understand the true bull case scenario... I don't think anybody is thinking that is a realistic scenario. I'd agree. The problem then becomes how to monetize the undervaluation. Aside from a same of the co and a return of the cash, what other options are there? I can't think of any. So, what are the chances of a sale given the dynamics between equity holders, how long will it take, and what is the IRR? That's my approach at least. Link to comment Share on other sites More sharing options...
valueyoda Posted June 22, 2014 Share Posted June 22, 2014 It is not going to happen, nor is a liquidation scenario plausible. A sale or liquidation of the company would automatically do away with the NOLs. However, transforming the existing company into a holding company with other businesses might. Link to comment Share on other sites More sharing options...
valueyoda Posted June 22, 2014 Share Posted June 22, 2014 http://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=1005&context=tax ; According to this very interesting academic article, the cumulative change in ownership of 5% holders seems to have been breached well before I bought shares or before Swenson sold his shares. In addition, even non 5% holders can be aggregated as a public direct group. Any thoughts? Let's figure out where currently the threshold lies, so that we can all act carefully. If for some reason, the threshold was breached before, then buying more wouldn't make a difference and the entire argument to institute a poison pill would go away. Link to comment Share on other sites More sharing options...
Hielko Posted June 22, 2014 Share Posted June 22, 2014 http://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=1005&context=tax ; According to this very interesting academic article, the cumulative change in ownership of 5% holders seems to have been breached well before I bought shares or before Swenson sold his shares. In addition, even non 5% holders can be aggregated as a public direct group. Any thoughts? I'm reasonable sure that the 50 percentage point threshold has never been breached in any 3 year period. When do you think this could have happened? You have Shevach Saraf and John Stayduhar as long term 5%+ owners with little change in their ownership. The other 5%+ owners have owned roughly 30% of the company the past few years so the maximum that they can contribute is a 30% point change of ownership (assuming their ownership went from zero to the current level: probably also the correct assumption). Link to comment Share on other sites More sharing options...
valueyoda Posted June 22, 2014 Share Posted June 22, 2014 You are probably correct, so I will do some additional investigation to make sure. Several articles I read counted both the purchase and sale towards the 50% change, and the academic article also counted the small non 5% holders as one public direct group. If that were true, the 50% threshold would have been triggered. If your argument is correct - which I hold on to as a baseline for now - we are still in the clear. Aside from that, on June 30th the initial purchase by Lauriston will expire. Link to comment Share on other sites More sharing options...
moody202 Posted June 22, 2014 Share Posted June 22, 2014 It is not going to happen, nor is a liquidation scenario plausible. A sale or liquidation of the company would automatically do away with the NOLs. However, transforming the existing company into a holding company with other businesses might. Do you have thoughts about what kind of other businesses should be bought in the holding company? Should they be related/synergistic to the current business or can be completely unrelated to the current businesses! Link to comment Share on other sites More sharing options...
valueyoda Posted June 23, 2014 Share Posted June 23, 2014 I would prefer stable businesses between $5-$15mln (family owned owned) with good management, good returns on invested capital that generate free cash flow on a constant basis. I am agnostic to the industries that those target companies operate in. However, I think that the company would prefer companies that are closer to the core business. Link to comment Share on other sites More sharing options...
moody202 Posted June 23, 2014 Share Posted June 23, 2014 I would prefer stable businesses between $5-$15mln (family owned owned) with good management, good returns on invested capital that generate free cash flow on a constant basis. I am agnostic to the industries that those target companies operate in. However, I think that the company would prefer companies that are closer to the core business. Does is not take a special kind of CEO to create and run an effective holding company? Very few CEO's are able to do this successfully. DO you believe the current SODI CEO has any ability to pull it off? Then there is the aspect of the passion current CEO has for creating a holding company given his age and tenure! Link to comment Share on other sites More sharing options...
Sportgamma Posted June 23, 2014 Share Posted June 23, 2014 I would prefer stable businesses between $5-$15mln (family owned owned) with good management, good returns on invested capital that generate free cash flow on a constant basis. I am agnostic to the industries that those target companies operate in. However, I think that the company would prefer companies that are closer to the core business. Does is not take a special kind of CEO to create and run an effective holding company? Very few CEO's are able to do this successfully. DO you believe the current SODI CEO has any ability to pull it off? Then there is the aspect of the passion current CEO has for creating a holding company given his age and tenure! Set up: Daily Journal Corp. Link to comment Share on other sites More sharing options...
valueyoda Posted June 23, 2014 Share Posted June 23, 2014 I love the Daily Journal model. And frankly, Solitron has a better core business than the Daily Journal Link to comment Share on other sites More sharing options...
moody202 Posted June 26, 2014 Share Posted June 26, 2014 I'm planning to attend the General meeting. Would be good to know and connect if anyone else ends up planning a visit. I spoke to the company lawyer from Ackerman. She was good with me attending even though I wasn't a shareholder on the record date! If you are not attending and have questions, send it over. I can certainly compile them and try to ask as many as I can. Link to comment Share on other sites More sharing options...
writser Posted June 26, 2014 Share Posted June 26, 2014 I have two broad questions. 1. Why does Saraf act so hostile towards minority shareholders? We don't want to oust him . 2. What's his vision for Solitron (and specifically taking into account capital allocation) for the next decade? I doubt we will get honest answers though .. Link to comment Share on other sites More sharing options...
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