Monday, June 1, 2009

Penny Ante Arbitrage Update IV

Cash-Out of Fractional Shares Foiled:

In previous posts (e.g., "Penny Ante Arbitrage" and "Penny Ante Arbitrage Update") I mentioned that I bought 749 shares of Asure Software (Nasdaq Capital Market: ASUR) at between 17 and 18 cents per share in several different accounts, in the hopes of getting them cashed out at 36 cents each after the company's proposed 750-1 reverse split (the first step in the company's plan to go private). Asure Software announced today that its shareholders rejected its go-private plan, so it has canceled its special shareholders meeting that was scheduled for tomorrow. So, my initial hopes of getting my shares cashed out at 36 cents have been dashed.

Mistakes Made, Lessons Learned:

In hindsight, when considering what might prevent this plan from going through, my focus was on the company's balance sheet and its burn rate: whether it would have enough cash to cash out the fractional shares. Given that most of the company's shareholders stood to benefit from the cash out, I didn't consider it a major risk that they wouldn't vote for it. A commenter on the company's Yahoo message board, whom I quoted here in March presciently did consider this a risk:

In any event, the risk isn't whether they will have enough cash, it's whether they can muster the required number of votes.

Just make sure you cast yours, ok?

At the time, I also didn't expect activist institutional investors to get involved in a $5 million market cap stock (though after activist investors came out against the plan, I still figured there was still a good chance of the go-private plan passing despite their involvement, considering that most of the company's shareholders were small holders who would benefit from the plan. Of course, most of those small shareholders probably never voted their proxies). There may be a useful lesson in this though: if companies with such tiny market caps can be the target of activist investors, it might be profitable to consider investing in more tiny companies with negative enterprise values, in anticipation of activist shareholders targeting the companies.

ASUR Going Forward:

In its press release today, the company said it had scheduled an annual meeting for July 30th. Given the rejection of its go-private plan, I would expect the company's current board to be ousted by activist investors. As I mentioned in my previous post on this, one of the activist investors, David Sandberg of Red Oak Partners, told me he felt he could unlock significant value from the company by getting more effective management in place,

[Sandberg] noted the cash on the company's balance sheet, that both of the company's businesses are high-margin ones, and said he thought a 70 cent price target was reasonable for the stock, given more effective management.

I don't know if Sandberg's 70 cent per share target is reasonable, but considering that ASUR had, at last count, 39 cents in net cash per share, it ought to have some upside from here based on that net cash, and the likelihood that, if the current management gets deposed, the company's cost structure should drop significantly, perhaps the point where it could become profitable from its existing business lines.


Ben Graham said...

With stated losses of 43 cents a share it might not take long to burn through their cash.

Forgent Networks Inc(NasdaqCM: ASUR)

52wk Range: 0.10 - 0.57
Volume: 169,102

P/E (ttm): N/A
EPS (ttm): -0.43

Albert said...

It's sad to see that age has finally caught up to Ben Graham/whomever logs in and comments as pseudo-famous personalities on Dave's blog.

Hey Ben, perhaps you should take a lesson in reading comprehension.

Anonymous said...

So the market wasn't so irrational after all.

It had this risk priced in all along. The foiled arbitragers weren't clued in by the unusually large discount that they might be at a severe information disadvantage.

Paul Price said...

This is expected with penny stocks, stick to large caps with great dividend yields and low P/E. Secrets to making millions. Penny stocks will make you penniless.
Anyone of you need a root canal after this fiasco?

the real stockdoc said...

above comment from a stockdoc wannabe.

DaveinHackensack said...

Ben Graham (Paul),

The TTM EPS number includes non-cash and non-recurring charges. Going by my math on my first post on this, I'd estimate the TTM cash burn rate has been less than 20 cents per share. Going forward though, as I mentioned in this post, the rejection of the company's go-private plan suggests that the current management's free-spending ways are about to end.


Remember, only accounts with fewer than 750 shares would have been eligible for the cash out, so even if the market were fully efficient, this would have limited the extent to which the shares could have been bid up.

DaveinHackensack said...

From Red Oak/Pinnacle's press release today, "Red Oak Partners and Pinnacle Fund Thank Asure Holders for Support in Successful Proxy Contest, Hope to Work with Asure Software to Enact Appropriate Change in the Interests of Shareholders":

"We recently named a superb slate of Board candidates which includes two prior Board members of Iemployee who served while it was a thriving and growing company; two individuals with a history of successfully building and growing technology companies and two representatives from Red Oak who possess significant public market and micro-cap knowledge and have a highly vested interest in Asure's success. We are excited with our slate, believe that change is both wanted by Asure's shareholders and is a good thing, and hope that Asure's management and Board will consider that their duty is to represent the best interests of their shareholders and recognize it's their shareholders who are pursuing this. Although clearly prepared to do so, we hope to not have to engage ASUR in another costly proxy contest and instead wish to work with its Board as soon as possible towards cost reductions and Board elections."

Sivaram Velauthapillai said...

You did a good job keeping us updated Dave. Even though it didn't turn into any sort of arbitrage, it was a wortwhile risk.

It looked like the privatization was off after the activist investor showed up. This isn't necessarily a bad thing and may result in higher returns. The risk now is that the so-called activist will undertake some action to enrich himself or herself at the expense of the company. I have seen some cases with smallcap stocks where some so-called activist investor shows, takes a somewhat sizeable position, and then enters into dubious deals with the company.

Since your purchase price is low, I think you'll be fine. The arbitrage-type situations that cause massive losses are the typical M&A deal where you buy after the stock starts trading at premium prices.

DaveinHackensack said...

The negative enterprise value (greater than the company's market cap at the time) provided some margin of safety. Once the activists got involved, the biggest risk, in my view, was that they'd not only succeed in stopping the go-private plan but also somehow get stalemated by current management in their plan to clean house. That would have been the worst of both worlds. The activists stopped the go-private plan, of course, but now it looks like they will also get their chance to clean house.

Yesterday, with almost two months still to go before the annual meeting, they already got their first scalp: Asure Software Announces Board Member Resignation. ASUR traded as high as .27 per share after hours yesterday on this news.