Activist Investor Situation of the Day - Cypress Bioscience, Inc. (CYPB)
As I have mentioned in a couple of recent posts, I have become increasingly interested in activist investor situations. If you can find them early enough, this sort of situation is great because many times the activist investors, such as hedge funds, etc..., often attempt to purchase the entire company, push for the company to be sold, or at the very least agitate significant changes in either a company's management, the Board of Directors, or operations to unlock hidden value.
There's pluses and minuses to following activist investors. On the plus side, you know that there's a good chance that there is a decent chance that something positive will happen to a company's stock...and happen fast. A perfect example of this is the CAPS purchase that I made in Penwest Pharmaceuticals (PPCO) after I found out that an activist investor named Kevin Tang had invested in the company (link). Less than a week after my CAPS pick of the stock, the company was bought out at a 26% premium to my starting price. Will every investment in a special situation like following activist investors result in a 1350% annualized return? Probably not, though it is a pleasant fiction to think of ;).
On the minus side, the stocks of companies that are involved in this type of situation have often risen significantly as a result of them. If one doesn't get in early enough, they miss a significant chunk of the potential gain and risk seeing the stock price fall to its pre-activist investor activity level, resulting in at least a temporary loss.
This is why I have been stepping up my research efforts on activist investing. I'm going to try to get in on as many of these situations as possible, as early as possible as long as they meet two criteria. 1) the company that I am picking must be at least reasonably attractive on its own, without the activist investor involvement.
This eliminates situations like Barnes & Noble (BKS) from consideration. 2) the activist investor that is attempting to influence the company must have a reasonably successful track record. This one is a little more difficult to quantify. I have been creating a list of activist investors who have been successful with stocks that I follow in the past. This will provide me with a nice subset of investors to follow.
Anyhow without further ado, I bring you my latest activist play for CAPS...Cypress Bioscience (CYPB).
An activist Hedge-fund operator Ramius LLC has been in a battle with the company, attempting to take it over. Now obviously I would have liked to have purchased a stake in CYPB prior to the media catching onto the fact that Ramius is interested in buying the company. I have seen it on a list of stocks that are trading at or near their cash values in the past and should have just snagged it then. Hindsight is always 20-20 I suppose.
On August 3rd, CYPB's stock skyrocketed 22% after Ramius offered $4/share for the company (link).
Just three days later, On August 6th Cypress rejected the Ramius offer stating that it significantly undervalues the company and saying the following (link):
"We have concluded you do not have a proper purpose for the inspection of Cypress' books and records and we will take all necessary action to defend that position and protect the interests of the other Cypress stockholders,"
Two days ago Ramius sent a letter to Cypress stating that it has raised its offer for the company to $4.00/share in cash and the retention of a 50% stake in the company's drug BL-1020 by current shareholders. Cypress paid $30 million for the rights to BL-1020, so Ramius values a 50% stake in it at another $0.37/share, making its total offer in its eyes $4.37/share. Ramius also said that it is willing to consider raising its offer if...it is granted limited due diligence and the Company agrees to negotiate in good faith around consummating a transaction (link).
Clearly there is a real potential for Cypress to be bought out by Ramius. So how much of a premium are we talking about from the stock's current level? CYPB is currently trading at $3.82/share. A $4/share cash offer is only 4.71% higher than today's price. If one adds in an additional $0.37 for the 50% interest in a drug that I know absolutely nothing about the deal premium rises to 14.4%...a lot better. The question is how existing shareholders would monetize or even be given their interest in the drug. I have no idea at this point.
A 4.7% to 14.4% upside in a weak market with the potential for an increased bid is a fairly attractive opportunity at first glance. Have I mentioned that I wish I had picked up Cypress earlier when I found it on the cheap stocks screen :)? This brings us to the two questions that I mentioned earlier...How successful has Ramius been in its activist activities in the past and B) how cheap is Cypress Bioscience at this level without the offer.
According to a Barron's piece that I came across a few weeks ago, in the recent past Ramius has filed five 13Ds with activist investor intentions. In those five instances, the stocks of these companies has risen 16.5% versus a loss of 12.3% for the S&P 500 over the same time period. That's an outperformance of 28.8%. So Ramius has a solid track record.
Onto the company itself. I don't know enough about biotech to judge the merits of Cypress's products on my own, so let's look at the company's liquidation value. As of March 31st, CYPB had the following assets (source):
Cash And Cash Equivalents: $30.575 million (100%)
Short Term Investments: $106.717 million (100%)
Net Receivables: $6.623 million (0%)
Other Current Assets: $1.313 million (0%)
Property Plant and Equipment: $1.197 million (25%)
Goodwill: $21.929 (0%)
Other Assets: $0.779 million (0%)
Let's be as conservative as possible here and assign full value to the cash / cash equivalents / short term investments, a 75% haircut to property, plant, and equipment, and nothing to net receivables, other current assets, or goodwill.
Assuming no value for goodwill means that all of the research Cypress has done and all of the drugs that it has the rights to are worth absolutely nothing. Obviously, this probably is not the case, but we're trying to be uber-conservative here.
OK when we add all of the above up it comes out to a conservative estimate of a liquidation value of around $138 million.
We need to subtract from that the company's $3.264 in accounts payable and $5.202 million in other current liabilities from that and we arrive at a rough, back-of-the-envelope liquidation value of around $130 million.
There's another line item on the balance sheet for $22.12 million called "Deferred Long Term Liability Charges." If I was going to put real money to work here I would have to look into exactly what that is.
Back to the $130 million figure. This compares fairly favorably with the company's $147.5 million market cap given the fact that we assumed absolutely zero value for Cypress' drugs and research. The down side appears to be fairly limited here.
Is this situation perfect? No. I would have liked to have entered CYPB when it was trading for two dollars and change several weeks ago. Then this trade was a slam dunk. Ramius obviously thought so too. I still feel as though the potential upside and limited downside make this a viable CAPS trade.