Friday, June 5, 2009

Potential Partial Sale/New Investor

After the poor Q1 earnings call, lack of Q2/2009 guidance, and the announcement that more information regarding "additional steps" will be announced, it was a signal that a sale or something more than the usual cost cuts was going on. After talking to some shareholders right after the call, it made sense that a sale might be in the works and posted about it. My choice/hope was for a direct competitor to scoop up UT at north of $5/share to take advantage of the tangible and intangible assets UT has and spare shareholders the continuous hope for profitability that doesn't seem to get any closer. With things looking bleak, that is often the time that management/board is forced to do something significant.

The stock closed at $1.55 before the earnings call and held its ground the next few days and started climbing. However, the amount of increase and volume did not support a sale north of $5/share which is a level that long time shareholders, the board, and management (I think) would have to get at a minimum to justify the existing tangible book value, failed sale of a couple of years ago, and potential growth of the core business. Also, the board will not let go for peanuts so a substantial increase would be needed for an outright sale. Contrary to the hopes of the more bullish investors, the market is too efficient to allow the stock to trade up for a significant amount of time (with the rumors already) and still get a huge premium.

Articles the last few days indicate a potential new investor will take a major position in UT. An outright sale to a direct competitor would bring in a quicker/higher price so the news that an investor will take a non-controlling (although large) stake actually supports the price action. While I would like a much higher price, it now looks like the price will most likely be much less than $5 and probably lower than $3 and could even be lower than the close today ($2.43).

Why? The negotiations started before the earnings call so the stock would have been below $1.5. A 50% premium would take it to $2.25 and a 100% premium to $3 (and thats considering that it rallied into earnings). Secondary's announced have almost always come with the stock already pricing in the event and often running past the agreed price (lots of examples).

Is this bad? Not necessarily. Actually, it should be very positive. A major Chinese investor paying $2, 3 or higher obviously think that its worth more than what they are paying for. Also, not being one of the direct competitors that could take advantage of the intangibles (tax savings, consolidation, saving of R&D, strategic contracts, technology, etc) means that it believes that the company can execute and operationally move higher as a standalone company (look at Palm for ex.).

It would seem unusual for the company to sell below tangible book or even cash but then again, UT is operationally losing money for the last 4-5 years. Also, even with the high cash position, future contracts/working capital needs may become higher (which is a good sign for future revenues). Also, it didn't trade below $1 if not for those same concerns.

Again, the overly bullish should look at WHY its not trading much higher (if you expect $8, is that reasonable the stock is still trading at $2.43 when everybody and their brother knows about the rumors). Those that sold much lower also have to ask why it moved higher after a bad Q1. Those that sold at $1.1-1.15 after buying at $1.25 thinking it was a good value buy should question their entire investment philosophy (just kidding Tigre :-)
Those hoping for the stock to go higher just because shorts are going to panick as if the offer will go higher are not making sense either. A deal has been worked out and just needs formalization.

Another issue about the cost cuts. A lot of people have been calling for cost cuts and I have posted a ton about the need for drastic cost cuts. Some have wanted more information as if the company's performance over the last 4-5 years, their guidance, and their behind the curve moves are now suddenly going to be justified by a humongous contract that we just don't know of are also misguided. And now they are "surprised" that there will be enormous cost cuts...Duh...Face it...the company has been behind the last 4-5 years! (But, this could be the turnaround sign that they finally get it and are taking drastic actions BEFORE another year passes).

Anyway, obviously the new investor will benefit UT in many ways from market confidence, Chinese/local involvement/contacts, potential strategic involvement, pushing the board/company for more accountability, etc. The stock will be much higher than the current price but it will get there unexpectedly as it has to this stage. I expected a bounce from the 60-80 but did not expect it to quadruple (although I still have the bulk of those shares and would gladly take more positive surprises).

Just be realistic out there and as I am constantly reminded, the market knows more than you (well this time, I'll pat my back and take the good fortune that it played out the way it did :-). By the way, the fact that it won't be sold entirely gives long time shareholders an opportunity to beneift in the short term as well as the opportunity to move forward with a drastically different UT and benefit if the revenue ramp finally comes. And thats a win-win (would be another win if Lu/Clarke are voted out as well and management/directors left buy shares after all the announcements are out of the way).

PS. As I mentioned during my trading discussions with Tigre, there is no chance for me to make doubles or even 30-40% in any other stock besides UT just because of the way I trade this market. On the other hand, I'm diehard enough to hold onto UT and this fortunately happened (or maybe I should take full credit and say I called it all the way...:-)

Have a good weekend.