Thursday, June 14, 2012

SigmaTron Spends Its Margin Of Safety

A couple of weeks ago we saw a company that was trading at a deep discount to its net current assets lever up to buy a company for more than the acquirer's own market cap! A reader alerted me to another net-net that just did the same thing!

SigmaTron (SGMA) had net current assets of $25 million, and trades for around $15 million. But it recently purchased one of its customers for $16 million (plus some pay-out provisions based on profitability).

Just like Blonder-Tongue, SigmaTron has not released the financials of the target. So, shareholders know they have just spent the equivalent of the company's entire market cap...they just don't know what they got in return! I asked SigmaTron if they would be willing to disclose this info, but haven't heard from them in a week now.

A worrying trend!

Disclosure: No position


Anonymous said...

Minor semantic correction: SigmaTron spent YOUR Margin of Safety, not its own.

Margin of safety is not a corporate financial metric. It is a value investor's metric for determining whether an investment is attractive on an asset basis as opposed to earnings basis.

Therein lies the tension between management and investors. The former try to maximize profits, the latter try to maximize returns. These goals usually overlap more often when investors buy companies in the belief that they will grow profits, not that they will be acquired or liquidated.

You have the right to use the phrase margin of safety in this flexible manner and make it refer to a company's own safety net against bankruptcy, but that is not how that phrase is used.

Floris said...

While i dont agree with their ma strategy, i think the consideration paid is wrong. The 14m in acc pay is a spontaneous operating liability not a debt. They have simply assumed the obligation to pay off the creditors. This is also likely offset by spontanous assets resulting in a much lower acquisition price. The agreement reads much more like a distress sale than an aquisition done at a lofty price. I could be very wrong though

Saj Karsan said...

Hi Floris,

But SigmaTron IS the creditor of that payable! They might not have received that money anyway though, as perhaps it is a distress situation where the target is going under anyway.