|IPO Values or The
Siren Call of Cash?
by Louis Corrigan
Atlanta, GA (July 21, 1997) -- How would you like to buy a company
for the price of the cash in its coffers -- or less? What about software
maker WORKGROUPTECHNOLOGY CORP. (Nasdaq: WKGP), which went public
in June 1996 at $15 a share? It can now be had for about $4 a share despite
recently reporting $4.67 a share in cash on hand. Or check out COLLABORATIVE
CLINICALRESEARCH (Nasdaq: CCLR), another firm that went public in June
1996, at $13 1/2. It now trades at around $6 despite having about $5.73 per
share in cash and short-term investments. Neither company has substantial
current liabilities nor any long-term debt. Sound promising?
It is relatively easy to find small-cap companies that have recently gone
public but been beaten into the ground. Many at least appear to be low-risk
investments at their current prices. After all, cash and marketable securities
are nearly sure things when compared to other major assets. Inventories,
for example, may prove all but worthless; receivables might end up being
uncollectable; plant and equipment may rapidly lose their worth if technology
changes. Though value investors come in different stripes, many focus on
a company's book
value, which is basically all assets minus all liabilities. So when a
stock trades at a discount not just to its book value but also to the cash
component of that book value, a value investor should be interested.
Any significant wad of cash can help a struggling company through hard times,
and it's absolutely required by development stage companies burning money
while doing the R&D or marketing necessary to launch a new product. The
lucre on the books offers downside support, providing investors a bit of
insurance while waiting for a company to turn around or for a potential highflyer
to get off the ground. On the other hand, money in the bank doesn't tell
you much about what you really want to know: a firm's business prospects.
After all, you aren't likely to get much from trading your quarter for two
dimes and a nickel controlled by the chieftain of a troubled company. Better
to find a cash cow than simply an equivalent amount of someone else's cash.
Still, an investor in search of cash-rich value plays may want to take a
look at recent initial public offerings (IPOs). With hundreds of companies
going public each year, dozens will run smack into trouble shortly after
they hit the market. As they fall, they lose even their poorly developed
following. It's not at all unusual to see a new offering drop to a third
of the post-IPO price within the first year or so. Despite such difficulties,
many of these companies remain flush with money raised in the IPO. Finding
good values, then, becomes a matter of determining which companies can get
back on track and how much time the cash buys them to do so.
Ryan Jacob, research director for IPO Value Monitor, a New York research
firm that advises institutional clients, cautions about the odds of finding
such a diamond in the rough. "There are very few deep value plays in companies
that have been public for less than a year."
Jacob said that new issues trading near their cash levels are there for a
reason. "Usually people feel there's not much more value to the company than
the cash on the balance sheet. You really have to look at it on a case by
case basis, but you're looking at troubled companies or development stage
companies that are expected to burn through a lot of cash."
He bases his stock recommendations on a firm's earnings potential. Stocks
that have imploded, regardless of their cash levels, aren't a great place
to look for earnings potential. Jacob suggested that to go hunting for value
among this rubble would require really examining a company's business plan
to see if it's executable or determining whether a company's research has
Marc Strausberg, founder of EDGAR
Online, offered a similar view. Once the editor of the now-defunct Livermore
Report, a newsletter that focused on short plays in the IPO market, Strausberg
once helped Carl Icahn make millions by betting against newly public companies.
He said balance sheets can be deceiving, especially for one-product companies.
"I would look beyond merely the cash involved, see if there's any viability
to the product."
He said that with many of the development stage drug companies, "You have
no clue about whether they have a commercially viable product." But Strausberg
also suggested that companies loaded with cash may look to use that money
to go into other businesses that may be more promising.
Prospecting for value in downtrodden new issues surely can be iffy. Overall,
IPOs underperform the market for years after their initial offerings, and
stocks that have dropped close to their cash levels are among the new issues
most likely to contribute to this underperformance. This overall poor showing
makes some sense. Underwriters usually price IPOs to allow for a 10% first
day pop in price. Most companies go public because they need money to build
the business or pay off debts, but most only do so when the current owners
think the market will award the shares an ample value. Factor in that first
day premium, and a new offering ought to be fully valued if the investment
bankers have served their corporate client as well as they should.
A stock that falls to half of its offering price has either not attracted
much aftermarket sponsorship from money managers that partake of IPOs, or
is a company that has run into unexpected trouble, forcing the market to
significantly re-price the stock. Neither bodes well for an investor finding
a genuine bargain among these ruins.
Still, all that cash can work like a siren's call, beckoning an investor
toward the rocks. The following odyssey represents a rather unscientific
sampling of mainly Nasdaq companies that have gone public over the last
and now trade at a discount to their IPO price; began with a market cap of
at least $30 million; have little or no debt; and are holding a lot of cash
as of their last quarterly earnings filing. In almost every case, it's fair
to assume the cash pile has been depleted a bit since the latest filing due
to continued losses, write-offs, or general corporate purposes. Also, we
haven't tracked developments at these firms at all. Some may have announced
new CEOs, new acquisitions, new business partners, you name it. And only
a few have both growing revenues and earnings. As a company's market cap
nears its cash position, chances are great that the company has reported
recent losses and perhaps no revenues at all.
Even so, be sure to plug your oarsmen's ears and lash your broker's number
to the mast lest you end crashed on the rocks among a pile of the rotting
dead. If you make it through safely, keep your cool and a coin handy in
preparation for your next choice: heads it's Scylla, tails Charybdis.
Stock prices as of 7/18/97:
Stock prices as of 7/18/97: Cerion
Technologies (CEON). IPO at $13 on 5/23/96, now at $2 3/8 ($2 1/8 to
$9 3/16). Market cap of $18.4 million. Cash and short-term investments of
PIA Merchandising (PIAM). IPO at $14 on 2/29/96, now at $5 1/2 ($5 to $15
5/8). See the recent Daily Trouble. Market cap of $30.2 million. Cash of
Farallon Communications (FRLN). IPO at $16 on 6/12/96, now at $4 5/8 ($3
1/2 to $15 1/4). Market cap of $54 million. Cash and short-term investments
of $40.4 million.
Prism Solutions (PRZM). IPO at $17 on 3/14/96, now at $5 5/16 ($4 1/4 to
$19). Market cap of $73.6 million. Cash and short-term investments of $33
FemRx Inc. (FMRX). IPO at $9 on 3/27/96, now at $4 ($1 1/2 to $10). Market
cap $34.8 million. Cash and short-term investments of $16.9 million.
OneWave (OWAV). IPO at $16 on 7/2/96, now at $2 7/8 ($1 9/16 to $18 1/8).
Market cap of $43.1 million. Cash and marketable securities of $37.8 million.
Unify (UNFY). IPO at $12 on 6/13/96, now at $2 1/16 ($2 to $14 1/2). Market
cap of $17.2 million. Cash and short-term investments of $18.6 million.
Workgroup Technology (WKGP). IPO at $15 on 3/21/96, now at $3 15/16 ($3 5/8
to $17 1/4). Market cap of $32 million. $37.95 million in cash.
Fusion Medical Technologies (FSON). IPO at $13 on 6/6/96, now at $4 5/8 ($2
5/16 to $10 1/8). Market cap of $33.5 million. Cash and securities of $19.4
Physiometrix (PHYX). IPO at $11 on 4/30/96, now at $2 3/4 ($2 5/8 to $7 1/4).
Market cap of $15.4 million. Cash and short-term investments of $16 million.
Infonautics (INFO). IPO at $14 on 4/29/96, now at $3 ($1 5/8 to $8 1/4).
Market cap of $30.8 million. Cash and short-term investments of $22.3 million.
General Surgical Innovations, Inc. (GSII). IPO at $15 on 5/9/96, now $5 ($3
3/8 to $13 1/4). Market cap of $66 million. Cash and securities of $46.4
Cardiogenesis (CGCP). IPO at $20 on 5/21/96, now at $10 7/8 ($7 1/4 to $17
1/2). Market cap of $141.8 million. Cash and securities of $52.7 million.
Optical Sensors Inc. (OPSI). IPO at $13 on 2/14/96, now at $5 ($4 to $11
3/4). Market cap of $37.7 million. Cash of $26.3 million.
Isocor (ICOR). IPO at $9 on 3/14/96, now at $2 5/8 ($1 7/8 to $10). Market
cap of $22.2 million. Cash and marketable securities of $23.9 million.
Cardiac Pathways (CPWY). IPO at $19 on 6/12/96, now $8 3/8 ($5 1/2 to $15
5/8). Market cap of $80.4 million. Cash and short-term investments of $45.1
SIBIA Neurosciences (SIBI). IPO at $11 on 5/9/95, now at $6 1/4 ($5 1/4 to
$9 1/2). Market cap of $57.7 million. Cash and securities of $38.4 million.
Medirisk (MDMD). IPO at $11 on 1/29/97, now at $8 ($6 1/4 to $11 1/4). Market
cap of $31.2 million. Cash of $13.9 million.
Photoelectron Corp. (PECX). IPO at $8 1/2 on 1/29/97, now at $8 1/2 ($4 1/8
$9 1/4). Market cap of $56.6 million. Cash of $18.5 million.
Premier Research Worldwide Ltd. (PRWW). IPO at $17 on 2/4/97,now at $9 1/2
($5 3/8 to $26 1/4). Market cap of $65.9 million. Cash and marketable securities
of $34.2 million.
Heartstream Inc. (HTST). IPO 1/31/96 at $13, now at $8 3/4 ($7 3/16 to $17
1/2). Market cap of $102.5 million. Cash and securities of $45.3 million.
Apache Medical Systems (AMSI). IPO at $12 on 6/27/96, now at $6 1/8 ($4 1/2
to $15 1/8). Market cap of $40.4 million. Cash and short-term investments
of $17.4 milion.
UroCor (UCOR). IPO at $11 on 5/16/96, now at $7 1/8 ($5 1/2 to $16). Market
cap of $72.4 million. Cash and short-term investments plus long-term investments
of $29.8 million.
Cylink Corp. (CYLK). IPO at $15 on 2/16/97, now at $8 13/16 ($6 5/8 to $16
1/2). Market cap of $242.5 million. Cash of $73.4 million.
Thermo Sentron (AMEX: TSR). IPO at $16 on 3/27/97, now at 11 3/8 ($8 11/16
to $15 1/8). Market cap of $113.6 million. Cash and securities of $34.2 million.
Document Sciences (DOCX). IPO at $12 on 9/20/96, now at $4 ($2 7/8 to $16
3/8). Market cap of $41.7 million. Cash and securities of $25.1 million.
White Pine Software (WPNE). IPO at $9 on 10/11/96, now at $2 3/8 ($2 to $9
5/8). Market cap of $23.8 million. Cash of $20.9 million.
Collaborative Clinical (CCLR). IPO at $13 1/2 on 6/10/96, now at $6 1/4 ($5
3/4 to $15 1/2). Market cap of $36.2 million. Cash and short-term investments
of $36.5 million.
Manchester Equipment (MANC). IPO at $10 on 12/2/96, now at $4 ($3 1/4 to
$10 1/2). Market cap of $36.2 million. Cash and marketable securities of