Monday, January 30, 2012

Mirage Of Rimage's Cash

Last year at this time, Rimage looked like an attractive stock. It had both a ton of cash relative to its market cap, and a steady source of cash flow such that it could generate a great return for shareholders. But as discussed here, what it lacked was a corporate structure conducive to creating wealth for shareholders. As a result, today the stock sits some 20% lower, and the value of the company has probably fallen by more than that.

Though Rimage had $118 million of net cash (compared to a current market cap of just $121 million), it blew more than $50 million in early October on an acquisition in a high-tech field (video communications). The acquisition generated revenue of just $2 million in the fourth quarter, but management appears to expect revenue growth of 40% per year for this business. (How could this possibly go wrong?)

Of course, anything's possible. Maybe this will turn out to be a great acquisition. The problem, though, is that certain returns (in the form of share repurchases that could have been done at a very cheap price) were traded for highly uncertain or non-existent returns. This likely occurred because of the corporate structure.

The company's CEO owns just over $1 million worth of Rimage stock, but his annual compensation is over $1 million as well. As such, he is likely to benefit far more from running a bigger company than from creating wealth for shareholders. He is also on the company's board of directors; but directors are supposed to represent shareholders! Clearly this is a conflict of interest.

Though a company may look cheap, an analysis of its corporate structure can help shareholders foresee the risks created by conflicts between principals and agents. Such an analysis of Rimage would have saved some value investors a lot of heartache.

Disclosure: No position

1 comment:

Anagram Man said...

Rimage is an anagram of mirage. Did you know that?

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