Money For Nothing|
by Guest Columnist Mike Chung
Anyone attuned to the pop music scene during the roaring 1980s, will perhaps remember the above title was an era-defining big hit for the British group Dire Straits back in 1985. However, the intent of this essay is not to write about showbiz, nor about the sometimes surreal behaviour of its protagonists. Rather, focus will be directed towards the surreal behaviour of stock market players during the latest crash and how cash was demonstrably given away for nothing in return; Money for Nothing if you will.
Anadigics Inc. (Nasdaq: ANAD) is a U.S. technology company providing semiconductor solutions to the broadband wireless and wireline communications markets. Its products include power amplifiers, tuner integrated circuits, active splitters, line amplifiers, and the likes. In line with the rest of the market, its stock price did not escape the recent carnage, tumbling to an intra-day low of $1.13 on November 18, 2008, a 92% drop from the 2008 year high of $13.54 on June 5.
However, the most astounding aspect of Anadigics' predicament is not to be found in the more than 90% loss in market value of its common stock. To find this most amazing feature, the intra-day low of $1.13 should be viewed against the assets and liabilities of the company.
On November 18, 2008, the latest available balance sheet (albeit an unaudited one) for Anadigics was the one as at September 27, 2008. A simplified version thereof is laid out in Table 1:
On the balance sheet, the definite eye popping item is Cash and Cash Equivalent which Anadigics reported at $130 million. With some 63 million shares outstanding, this translates into $2.06 of Cash and Cash Equivalent per share.
Therefore, on November 18, 2008, the sellers of Anadigics shares at $1.13 were willing to receive only $1.13 while giving up ownership of $2.06 of cold hard cash. In other words, on the basis of the latest information available, they accepted to receive only 55 cents for every dollar of the company's reported cash holdings, thereby giving away 45 cents of Money for Nothing!
Assets For Free
Yet, this was not the end of this mind boggling giveaway freebie. Going further down the balance sheet, Anadigics reported Total Assets of $341 million. Subtracting 'Cash and Cash Equivalent', 'Goodwill and Other Intangibles' and 'Total Liabilities', one ends up with $126 million ($2.00 on a per share basis) of Net Tangible Assets excluding Cash as shown in the last but one line of Table 1.
And the sellers at $1.13 were giving away all that for free, relinquishing their part ownership of Anadigics' Land, Buildings, Machinery, Inventory, Receivables, etc. (having an accounting book value of $2.00 per share) for nothing in return, thereby implicitly valuing all those tangible assets at zero. Equally important, any earning power of the company to generate future profits, was also being given away for free.
According to Bloomberg data, 4,550 Anadigics shares were traded in total on November 18 at $1.13 in 3 separate trades. And 2 days later (November 20), 18 separate trades at the same low price again took place for 6,750 shares in aggregate. Why would some Anadigics shareholders give away their part ownership of cash and other tangible assets for much less in return?
This is the most often heard explanation. With the market value of their holdings in free fall, some shareholders panic. They are willing to receive much less in return, preferring to get rid of their shares in order to spare them the anguish of experiencing any potential future drop in market value of those shares. They throw in the towel so to speak.
The company is expected to be worth less in the future
A ferocious bear market like the one recently experienced is usually a harbinger of an upcoming recession. With the economic outlook so unfavourable and fear ruling market sentiments, some Anadigics shareholders might extrapolate that the long term future of the company will be very negative and therefore, will eat into the current value of its assets. Hence, for these shareholders, such overly depressed price is fairly representative of the present value of the company's shares.
However, as the father of Security Analysis, Benjamin Graham had shown decades ago (1), there is a paradox in such a way of looking at the company's future. Company's management probably makes up the most knowledgeable people on the company's affairs. If management truly thinks the company will be worth less in the future as some shareholders do, it will put forward a resolution with the shareholders to immediately cease the company's operations and liquidate it.
So, instead of waiting for a negative future to eat away the value of the company's assets, the shareholders will receive more upon immediate liquidation of those assets than what they can fetch in the stock market. And if the managers have themselves been buying the shares at such overly depressed prices, they will personally profit upon the company's liquidation.
In Anadigics' case, its latest balance sheet shows Net Tangible Assets (i.e. including Cash) of $4.06 per share. If the company is to be liquidated on the spot, the shareholders will probably receive less than such accounting book value of $4.06 per share. But with cold hard cash making up $2.06 of this $4.06, there was a sufficient margin of safety for the shareholders to receive more upon the company's liquidation than if they sell in the market at or in the region of $1.13 per share. However, given that Anadigics management is not calling for an immediate liquidation of the company, its overly depressed market valuation is more likely to be a reflection of irrational shareholders behaviour.
Institutions such as pension funds, insurance companies and endowments are often characterized by constraints which they self-impose on their stock holdings. One frequent restriction is the minimum market capitalization of the companies in which they put money. During a severe bear market, a good number of those companies (especially those which were hitherto teetering on the brink of slipping into the small cap segment) have seen their market capitalizations plummet below those required minimums, thereby instantaneously becoming unqualified to be held by the institutions. The latter are thence compelled to sell the shares of those companies in order to satisfy their compliance requirements once again and such sales are bound to be done at whatever prevailing market price; unfortunately, with the added consequence of triggering capital losses.
Nowadays, it is not uncommon for market players to be buying shares on margin. As market prices go down precipitously, margin calls are issued. However, it would not be unusual to find the margin account holders dithering on any course of action at such times because they are bewildered or even paralyzed by market fear/panic. In those instances, the brokers will take the initiative to liquidate some of the holdings in order to bring the margin accounts back into compliance. Those liquidations are typically carried out by the broker's margin compliance officer who will sell wherever there is a bid, without much regard to the market prices that can be obtained during such sales.
Similar to margin calls, when mutual funds and hedge funds face massive redemption requests during market slumps, they are forced to liquidate part of their holdings. Virtually in a panic selling mode during those times, they will sell at whatever available price.
Anadigics was not the only instance in the U.S. whereby the recent market bear valued the whole company at less than its cash holdings. Table 2 shows a few other instances which have occurred during the latest market slump.
Although in the cases of Nanoshpere Inc. and Hilltop Holdings where their respective Net Tangible Assets excluding Cash turned out to be negative, their latest reported cash holdings were sufficiently above the low market price to provide further illustrations of the sellers' surreal behaviour as discussed above.
On the other hand, how about those who were on the other side of the trades; i.e. the buyers of those shares at the low prices? It would be readily understandable if they felt like Santa had indeed been in town.
About the Author: Mike Chung, CFA is an analyst at a leading Canadian pension fund and occasionally writes on a freelance basis. Before immigrating to Canada, he was a financial journalist in the Indian Ocean island of Mauritius, including a stint as correspondent for Reuters, the global information company. He graduated from U.K.'s London School of Economics with a BSc. (Econ) in Accounting and Finance. He can be contacted at m.chung[at]rocketmail.com
Disclaimer: The sole intent of this essay is to illustrate irrational behaviour during times of market stress. Under no circumstance, it should be construed as investment advice, nor should it be used as an investment advice. The opinions expressed are those of the author alone and do not necessarily represent those of Stingy Investor or related parties.
(1): 'Is American Business Worth More Dead Than Alive?' Benjamin Graham, Forbes, June 1932.
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