Wednesday, November 2, 2011

Urbana Management Responds

A few days ago, a group of value investors (which included the authors of sites and sent a letter to Urbana's chief executive asking that the company be more aggressive in its share buybacks. Frequent visitors to this site may recall that Urbana has been discussed here as a potential value investment due to the rather large discount at which it trades to its (mostly stock) portfolio. Management's response was rather predictable.

While CEO Tom Caldwell did take the time to write a thoughtful response, shareholders should be mostly disappointed with its essence. Caldwell makes it clear that he doesn't want to shrink the company's capital base:

"We do plan to build this company and our goal is significantly above its current size. I would not like to run our size down too much."

Yes, Caldwell is having the company buy back some of its shares (around 10% per year). But make no mistake, this is not a selfless act. Caldwell does own $4 million or so worth of shares, so he does have a significant interest in the share price. But his management fees provide incentives that are opposite to those of shareholders. These fees are based on the size of Urbana's portfolio; so the smaller the portfolio, the lower the fees.

Last year, these fees totaled almost $2.4 million! If Urbana were to get serious about creating shareholder value through a large buyback, these management fees would fall significantly, and that would hurt Caldwell.

To Caldwell's credit, he was honest about his intentions. There are many managers out there with similar incentives (or worse, as many have little to no ownership stakes) but who will pretend their goal is to enhance shareholder value (whereas their real goal is to grow the company, even if that growth is unprofitable).

But the problem for shareholders remains, nevertheless. When shareholder and manager incentives are misaligned, as they are here, management is not going to do everything it can to enhance shareholder value. In that case, buyer beware!

Disclosure: Author has a long position in shares of URB


Anonymous said...

So why do you own any shares in this outfit? It seems like the exact kind of company i would avoid.Sometimes a discount in the share price is justified or maybe it is not enough.

Anonymous said...

I notice that most of their investments in exchanges have been absolute disasters. Most are held 50% or so below the initial purchase price. whats the evidence to say these guys are good? I think given lack of liquidity and poor investment history, this should trade at a massive discount.

Saj Karsan said...

Hi Anon,

I agree the investor may be no good, but the large discount combined with the 10% annual buyback was too much for me to pass up. Everyone will have a different opinion on the threshold for a buy.

Anonymous said...

I'm a bit late to this topic but would like to add my 2 cents.
You mentioned the fee without mentioning how egregious it is - it's 3%.

He controls the fund and can prevent it from being liquidated. There is literally nothing to stop him from doing nothing ( he has several other businesses ) and collecting 3% per year for the indefinite future.

The buybacks may just be a token gesture to keep the share price propped up.

I think that merits a pretty steep discount, not to mention his atrocious investment record.

Anonymous said...

Any chance you know what % of the equity this group represented?