Thursday, September 9, 2010

Acquirer Buys Cash At A Discount

Qiao Xing Mobile (QXM) has been on the Stock Ideas page for almost one year now, due primarily to the discount at which the company trades to its large cash balance. The good news is that shares rose almost 40% yesterday as an offer came in to buy out shareholders at a premium to the current price. The bad news is that the offer is still well below the company's net cash position!

QXM more or less breaks even on an operating basis due to intense competition in the mobile handset market in China. But cash is still cash! The company has $265 million of cash on its balance sheet even after subtracting all of the company's liabilities! But the buyout offer only values the company at $206 million. Furthermore, the company has another $120 million of current assets (receivables, inventory etc.) that the acquirer would receive absolutely free.

Usually, acquisitions are made at a premium to, at the very least, a company's net current assets. So why is this offer such a weak one? The reason may be that the acquirer already owns a majority of QXM's shares. As such, it only has to deal with minority shareholders, who don't control the company and who may be powerless to avoid selling cash at far less than cash value.

Recognizing that minority shareholders can get bullied by those in control, the SEC does offer minority shareholders some protections. It remains to be seen whether those protections are enough in this case to keep QXM shareholders from getting ripped off.

Disclosure: Author has a long position in shares of QXM


rayhaan said...

yo saj, nice article,wish d minority shareholders kud get a better deal but dey probably wudnt. Reminds of d abuse of power d promoters a.k.a d controlling shareholders put minority investors thru like issuing warrants 2 demselves even though d company has plenty of cash, making preferential issue of shares at less dan fair prices etc . So, do u factor in such manegerial abuses in ur intrinsic value calculations? important is the free cashflow to sales ratio? Is it better on d higher side or d lower one? P.s dude! I told u starting a starting a vlog is a rad idea ,just received an email from d classicvalue dude , he's starting sum channel or sumthing.:(

Unknown said...

Hey Saj, wasn't this company in question for fraud about a year ago? You brought up the late reporting, son/father internal control, etc. I do not see how betting on a higher acquisition price is really a safe bet.

Mike.Gayner said...

rayhaan - English, please.

Saj Karsan said...

Hi Rayhaan,

I don't know how to factor in management abuses into a calculation of intrinsic value. But for one thing, I would suggest subtracting the value of outstanding warrants from your calculation. If there are actual abuses however, the best thing may be to avoid investing altogether.

A higher free cash flow to sales is better, all other things equal. But all other things are rarely equal, as every business and industry will have factors affecting that number. How important the ratio is depends on whether you're paying a high price for the company.

Hi ak,

I don't suggest betting on a higher acquisition price. But for investors who already invested at the discount to cash, I was trying to start a discussion on whether the offer price is fair.