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Activist Investors, Cheap Stocks, and PB & J

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May 25, 2010 – Comments (7) | RELATED TICKERS: SXCLD

  

Some things in life just seem as though they were made to go together, such as chocolate and pretzels, bacon and eggs, rum and Coke, and peanut butter and jelly (try it deep fried some time, it will blow your mind).  Let's add another one to the list...activist investors and cheap companies. 

Activists that gain control of companies from incompetent management are often able to unlock value that the market isn't recognizing.  That's the situation that I'm looking at today.  Several months ago the activist investor Steel Partners LLC gained control of a company called Adaptec.

 

Adaptec was once a storage networking giant that traded at over $60/share during the dot com boom.  Today the company is a complete mess that trades at a little over $2.80/share.

Adaptec recently agreed to sell its RAID business to PMC-Sierra for $34 million.  So what's left?  Adaptec still has its small ASIC business, a couple hundred patents, some real estate, and around $400 million in cash.

As I said, ADPT is a mess, but it's a cheap mess that is in the process of liquidating...that's why I am looking at it.  It currently has a market cap of only $343 million.

Obviously $400 million in cash alone is less than $343 million.  That makes this situation attractive. The question is what is Steel Partners going to do once this company is completely dissolved.  

Earlier this month Adaptec that it “plans to explore all strategic alternatives to deploy the proceeds of the sale” of its remaining holdings.  I suspect that this includes purchasing another business or returning money to shareholders.  I'm sure that it involves lining Steel's pockets, so if I am able to come along for the ride I'm going to.

I haven't done enough research on this idea yet to justify buying this stock in real life, but I have decided to add Adaptec to my CAPS portfolio today at $2.78/share.   

I'd love to hear others' thoughts on Adaptec or if Steel Partners anyone out there is familiar with them.

Deej

No position in ADPT 

7 Comments – Post Your Own

#1) On May 25, 2010 at 5:55 PM, FreeMortal (29.32) wrote:

Are those patents worth anything anymore?  For example, Microsoft probably has billions' worth of patents --most of which will never be used.

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#2) On May 25, 2010 at 6:10 PM, blesto (31.63) wrote:

So, would the reason to buy it be if they were to distribute the cash to shareholders?

A shell company with alot of cash. What would you do with it?

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#3) On May 25, 2010 at 6:11 PM, TMFDeej (99.33) wrote:

Good question Mortal.  I freely admit that I have absolutely no idea how much ADPT's patents are worth.  My guess is probably not much.  Perhaps there's someone out there in the tech industry who can shed some light on that issue for us.

The company is already trading at less than the cash on its books, so any additional dollar that gets from its patents during liquidation is a dollar more that its worth (in market cap, not share price).  

If I have some time, I'll do some digging and try to find out more about what sort of patents Adaptec owns.  I certainly would do so prior to investing real money in this company.

Deej 

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#4) On May 25, 2010 at 6:15 PM, TMFDeej (99.33) wrote:

Blesto, ideally Steel will return the money that it gets in liquidation to shareholders in the form of a distribution.  I'd be all over ADPT if I knew that was definitely the case.  Part of the reason that this stock is so cheap is because no one knows for certain how this story will end, at least not members of the general public like us.  

I suppose that it is entirely possible that ADPT would become a shell company that could use this cash to invest in something else.  That would not be my preference, but I don't have a whole lot of say on the matter ;).  If that happened one would have to figure out what ADPT planned on doing with the money and then look at the track record of the decision marker and decide if they want to be along for the ride.

Deej 

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#5) On May 25, 2010 at 6:54 PM, MikeMark (29.47) wrote:

I worked with adaptec in the 90s quite a lot. It was a great company then. Its asic parts were the cutting edge. There were two or three companies that engaged in that type of asic work: asics for hard drives and adapters. Some of the hard drive companies developed their own, but most found it better to outsource.

Intel has probably taken over as the leader in the areas that adaptec works. That's what seems to have happened. I have an associate that worked for adaptec in the 90s and early 2000s and now works for Intel. I'd guess that to be the travel path for the engineering intelligence. As for patents, there may be something there, but a little firm like adaptec really doesn't have guns big enough to play in a skirmish against the likes of Intel.

If I were thinking hard about buying for engineering & new product value here, I'd look into the engineers they currently have working for them. ASIC engineers are generally expensive, good ones doubly so. If they have a good one still on board, there may be some plans to revamp the product line in some way. If they don't, it's all probably in the cash and current holdings.

What liabilities do they show? Are they currently engaged in any litigation? Do they have any outstanding contracts? What obligations do they have? Those are the questions that come to my mind.

-MikeMark

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#6) On May 26, 2010 at 9:39 AM, TMFDeej (99.33) wrote:

Thanks for the fantastic background information, Mike.  You've gotta love how the Internet helps people connect.

I completely agree with your assessment of the patents.  I'm not sure how valuable the technology is to begin with and I'm sure that Steel isn't about to get into an expensive legal defense of them when it is in the process of winding Adaptec down.

I doubt that the company has any awesome engineers left either.  I know that it has closed a number of its facilities.  Anyone who was good would have realized a long time ago that there's no future here and likely jumped ship.  I think that there's little chance of a turnaround of the current ADPT business.  

The only value that's here is in scrapping the company and selling off the parts. 

Deej 

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#7) On May 27, 2010 at 3:18 PM, YooCanFly (27.98) wrote:

i love your blog posts Deej

being a asic designer myself (entry level), i have not heard of adaptec whatsoever in these days...

definitely will watch what they do in the future. 

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