metoo105 (31.31)

The Risks of Selectica

February 21, 2011 – Comments (0) | RELATED TICKERS: SLTC , ADPT.PK

I wrote up Selectica a few days ago. It is a balance sheet play that one assumes will soon realize its value.

If you have read Versata v. Selectica or Selectica v. Versata, you would know:

1. That before Versata triggered the pill, Needham was shopping Selectica and had interested suitors.

2. That Selectica has NOLs on the order of $160 million according to its experts.

Now that the case has been litigated and the cloud is no longer there, there are presumably a few new issues. One issue is whether the purchase of the pill and trigger that led to the poison pill dilution might have itself led to some impairment of the NOLs. This is not a question that can be easily answered. But it would presumably only be settled by a PLR or private letter ruling. However, since the trigger on the pill was set at 5%, which was below the 20% threshold at which impairment would occur, I assume that the value is intact.

Second there is a question of what $160 million in net operating losses is worth. I assume that the potentially buyers would all be other technology companies. An article from last week's WSJ argued that most domestic tech companies have been eagerly pursuing methods of reducing their tax costs. A purchase of this NOL would fit the bill, and another tech company would actually know what to do with carcass that Selectica leaves behind. There is a question of how another company will evaluate the risk of utilizing SLTC's NOL, and this will determine the price that they might be willing to pay to purchase the company. My back of the envelope calculation tells me that the asset is worth at least $60 million. I believe that it is likely worth more because there is quite likely a Franchise Tax Board NOL that mirrors the IRS benefit.

There is the question about the going concern and what it may be worth aside from its cash, if anything at all. The Versata litigation strongly suggests that the SLTC business is worthing something to someone in excess of its current value, but there are there are then complicated questions about what sort of asset sale may occur without impairing the value of its Section 382 tax asset, and the elephant in the room question, which is why didn't Selectica sell its business to Versata and then sell its tax asset to someone else prior to the litigation.

As I see it, the only question that raises the issue that this is anything other than a bloated pig is the one pertaining to what, if anything, the triggering of the pill has done to the tax asset. My hope is that it has not affected it in any way.  This hard to quantify risk is to be measured against -- what I would guess is going to be a 3 to 7 times return on investment.

There is also a question of time horizon. My guess is that this is moving along quickly given my earlier reading of the case and the fact that its settled that there were interested purchasers even when the companies were mostly worried about many more essential things than there taxable rate.  Other Steel Partners ventures have also suddenly gathered some attention and seem to be putting on window dressing in anticipation of a sale. COSN, for instance, is another company that has seen itself, delisted, etc.