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We'll dig our way out of that hole when we get into it. -- Jim Murdoch

IPO Values or The Siren Call of Cash?
by Louis Corrigan (RgeSeymour@aol.com)

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 potential value.

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 18 months 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 $7.5 million. www.sec.gov/Archives/edgar/data/1011067/0000950135-97-002091.txt

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 $21.8 million. www.sec.gov/Archives/edgar/data/1004989/0000912057-97-017367.txt

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. www.sec.gov/Archives/edgar/data/1012482/0001012482-97-000017.txt

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 million. www.sec.gov/Archives/edgar/data/1008129/0000891618-97-002219.txt

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. www.sec.gov/Archives/edgar/data/1007321/0001007321-97-000001.txt

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. www.sec.gov/Archives/edgar/data/1011255/0000927016-97-001451.txt

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. www.sec.gov/Archives/edgar/data/880562/0000912057-97-008829.txt)

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. www.sec.gov/Archives/edgar/data/1007021/0000927016-97-001813.txt

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 million. www.sec.gov/Archives/edgar/data/1013466/0000912057-97-018136.txt

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. www.sec.gov/Archives/edgar/data/1010397/0000912057-97-016712.txt

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. www.sec.gov/Archives/edgar/data/909494/0000912057-97-017732.txt

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 million. www.sec.gov/Archives/edgar/data/890763/0000912057-97-017005.txt

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. www.sec.gov/Archives/edgar/data/1013465/0000891618-97-002307.txt

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. www.sec.gov/Archives/edgar/data/907658/0000950131-97-002929.txt

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. www.sec.gov/Archives/edgar/data/879283/0000950148-97-001414.txt

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 million. www.sec.gov/Archives/edgar/data/1012367/0000891618-97-002131.txt

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. www.sec.gov/Archives/edgar/data/1011065/0000936392-97-000716.txt

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. www.sec.gov/Archives/edgar/data/927456/0000950144-97-005727.txt

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. www.sec.gov/Archives/edgar/data/921960/0000927016-97-001378.txt

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. www.sec.gov/Archives/edgar/data/1026650/0000950116-97-000977.txt

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. www.sec.gov/Archives/edgar/data/1004313/0000912057-97-017610.txt

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. www.sec.gov/Archives/edgar/data/883697/0000950133-97-001754.txt

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. www.sec.gov/Archives/edgar/data/946945/0000912057-97-017652.txt

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. www.sec.gov/Archives/edgar/data/1005230/0000950005-97-000502.txt

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. www.sec.gov/Archives/edgar/data/1007022/0001012555-97-000005.txt

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. www.sec.gov/Archives/edgar/data/1016831/0000936392-97-000710.txt

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. www.sec.gov/Archives/edgar/data/1006591/0000927016-97-001498.txt

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. www.sec.gov/Archives/edgar/data/886530/0000950152-97-003817.txt

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 $18.6 million. www.sec.gov/Archives/edgar/data/1023876/0001023876-97-000010.txt

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