ADPT CORP ADPT
August 17, 2010 - 10:19pm EST by
bgm722
2010 2011
Price: 2.80 EPS $0.00 $0.00
Shares Out. (in M): 120 P/E 0.0x 0.0x
Market Cap (in M): 335 P/FCF 0.0x 0.0x
Net Debt (in M): -394 EBIT 0 0
TEV: -59 TEV/EBIT 0.0x 0.0x

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Description

 

Adaptec (ADPT) is a shell being run by Steel Partners.  Steel has 26.6% of the equity and controls the board with the intention to deploy the substantial pile of cash and tax assets towards purchasing a new business.  This has been a long, drawn out process for Steel who first got involved three and a half years ago.  But investors have the opportunity to invest with Steel at a significant discount and participate in what should be relatively straightforward endgame. 


cap struct

 

 

 

 

price

$2.80

 

 

 

 

shares out

119.68

 

 

 

 

cap

$335

 

 

 

 

 

 

 

 

 

 

debt

$0

 

 

 

 

cash

$394

 

includes the PMC sale

EV

($59)

 

 

 

 

 

 

 

 

 

 

Book Value

 

notes

 

cash

$394

 

 

 

 

land

$20

 

104k sq. ft. office in Milpitas CA at $200/sqft.

DTAs

$45

 

$90m of net DTAs at a 50% haircut

 

 

acuisition cost

-$10

 

 

 

 

 

 

 

 

 

 

value

$449

 

 

 

 

per share

$3.75

 

 

 

 

upside

34%

 

 

 

 




 

Most of the Adaptec legacy business was sold to PMC-Sierra in May for $34m.  The sale finalized years of value destruction by previous management through continued reinvestment and serial acquisitions were never able to overcome the impending obsolescence of Adaptec's core RAID technology.  All that is left is the Aristos business (purchased for $41m in August 2008 and being wound down over the next quarter), ~200 patents, and the company headquarters in Silicon Valley.   There may be some residual value to the remaining patent portfolio - ADPT burned over $300m in R+D over five years and, according to an industry contact, had some interesting solid state caching technology.   But my understanding is that PMC-Sierra took the whole of the legacy business, a perpetual license for the remaining, non-core patents, and I ascribe them no value here.   As a side note, one analyst I spoke with thought that the value of the patents could be maximized by auctioning them off to lawyers to engage in extortive infringement litigation.  

 

The portfolio of tax assets includes the following:

 


Deferred tax assets

 

 

 

Intangible assets

26,790

 

 

NOL carryovers

60,824

 + 7.4m of tax benefits in 11Q1

 

R+D tax credits

29,440

 

 

Capitalized R+D

6,291

 

 

Compensatory and other Accruals

9,847

 

 

Restructuring Charges

265

 

 

Foreign Tax Credits

9,826

 

 

Deferred Revenue

1,051

 

 

Inventory Reserves

2,188

 

 

Uniform Capitalization Adjustment

561

 

 

Fixed Assets Accrual

1,456

 

 

Other, net

1,454

 

Gross DTA

149,993

 

 

 

 

 

Deferred Tax Liabilities

 

 

 

Acquisition Related Charges

(329)

 

 

Unremited Earnings

(59,144)

 

 

Fixed Assets Accrual

 

 

 

Unrealized Loss On Investments

(1,000)

 

Gross DTL

(60,473)

 

 

 

 

 

Net Tax Assets

89,520

 

 

 

 

 

----------------------------

 

 

NOL carryforwards

 

 

 

federal

149,700

expire beginning 2019

 

state

174,700

expire beginning 2010

 

 

 

 

Cash Held at Foreign Subs

3,300

11Q1



I'm not a tax expert and have discounted the net tax assets by 50%.  But clearly, maximizing the value of the tax assets is part of Steel's investment thesis and they have the resources and experience to use the assets efficiently.   Tax assets are masked by a valuation allowance that is more historical legacy than an active attempt by Steel to obscure value.   My understanding is that cash has been repatriated to the U.S. from foreign subsidiaries, but that the associated tax liability is outstanding.

 

$5m in cash is being held in escrow following the PMC-Sierra transaction.  There is a minimal option and restricted stock overhang.  The securities portfolio is mostly (~75%) short dated (0-3 years) corporates and agencies.  Remaining rent obligations are $2m and remaining purchase obligations are $3m, but these will be negotiated down to match the runoff business.  Expected severance and benefits are $3.7m of which $2.3m was recorded in the fiscal first quarter (to July 2010).  Current assets (small receivables, prepaid expenses), property and equipment and other long term assets (investments in 2 VC funds) are on the books for ~$20m - roughly equivalent to total payables, other accrued liabilities, and other long term liabilities (mostly taxes).

 

There are several reasons to believe that the time horizon for a purchase is shorter rather than longer.  Steel is beholden to its investors, especially after trying to convert to a public partnership following steep losses and redemptions at the end of 2008.   ADPT took $10m of impairments in the last quarter, accelerating losses and creating tax assets.   The latest filing also announces the intention to put the building up for sale at the end of the year.   The tangle with the SEC and Steel's large equity holding mitigate the risk of value being shuffled out the door.   The fact that Steel is buying shares for its own account, rather than retiring them with ADPT's money, every time the share price dips below $3 is a positive.

 

 

Catalyst

 As described above
    sort by   Expand   New

    Description

     

    Adaptec (ADPT) is a shell being run by Steel Partners.  Steel has 26.6% of the equity and controls the board with the intention to deploy the substantial pile of cash and tax assets towards purchasing a new business.  This has been a long, drawn out process for Steel who first got involved three and a half years ago.  But investors have the opportunity to invest with Steel at a significant discount and participate in what should be relatively straightforward endgame. 


    cap struct

     

     

     

     

    price

    $2.80

     

     

     

     

    shares out

    119.68

     

     

     

     

    cap

    $335

     

     

     

     

     

     

     

     

     

     

    debt

    $0

     

     

     

     

    cash

    $394

     

    includes the PMC sale

    EV

    ($59)

     

     

     

     

     

     

     

     

     

     

    Book Value

     

    notes

     

    cash

    $394

     

     

     

     

    land

    $20

     

    104k sq. ft. office in Milpitas CA at $200/sqft.

    DTAs

    $45

     

    $90m of net DTAs at a 50% haircut

     

     

    acuisition cost

    -$10

     

     

     

     

     

     

     

     

     

     

    value

    $449

     

     

     

     

    per share

    $3.75

     

     

     

     

    upside

    34%

     

     

     

     




     

    Most of the Adaptec legacy business was sold to PMC-Sierra in May for $34m.  The sale finalized years of value destruction by previous management through continued reinvestment and serial acquisitions were never able to overcome the impending obsolescence of Adaptec's core RAID technology.  All that is left is the Aristos business (purchased for $41m in August 2008 and being wound down over the next quarter), ~200 patents, and the company headquarters in Silicon Valley.   There may be some residual value to the remaining patent portfolio - ADPT burned over $300m in R+D over five years and, according to an industry contact, had some interesting solid state caching technology.   But my understanding is that PMC-Sierra took the whole of the legacy business, a perpetual license for the remaining, non-core patents, and I ascribe them no value here.   As a side note, one analyst I spoke with thought that the value of the patents could be maximized by auctioning them off to lawyers to engage in extortive infringement litigation.  

     

    The portfolio of tax assets includes the following:

     


    Deferred tax assets

     

     

     

    Intangible assets

    26,790

     

     

    NOL carryovers

    60,824

     + 7.4m of tax benefits in 11Q1

     

    R+D tax credits

    29,440

     

     

    Capitalized R+D

    6,291

     

     

    Compensatory and other Accruals

    9,847

     

     

    Restructuring Charges

    265

     

     

    Foreign Tax Credits

    9,826

     

     

    Deferred Revenue

    1,051

     

     

    Inventory Reserves

    2,188

     

     

    Uniform Capitalization Adjustment

    561

     

     

    Fixed Assets Accrual

    1,456

     

     

    Other, net

    1,454

     

    Gross DTA

    149,993

     

     

     

     

     

    Deferred Tax Liabilities

     

     

     

    Acquisition Related Charges

    (329)

     

     

    Unremited Earnings

    (59,144)

     

     

    Fixed Assets Accrual

     

     

     

    Unrealized Loss On Investments

    (1,000)

     

    Gross DTL

    (60,473)

     

     

     

     

     

    Net Tax Assets

    89,520

     

     

     

     

     

    ----------------------------

     

     

    NOL carryforwards

     

     

     

    federal

    149,700

    expire beginning 2019

     

    state

    174,700

    expire beginning 2010

     

     

     

     

    Cash Held at Foreign Subs

    3,300

    11Q1



    I'm not a tax expert and have discounted the net tax assets by 50%.  But clearly, maximizing the value of the tax assets is part of Steel's investment thesis and they have the resources and experience to use the assets efficiently.   Tax assets are masked by a valuation allowance that is more historical legacy than an active attempt by Steel to obscure value.   My understanding is that cash has been repatriated to the U.S. from foreign subsidiaries, but that the associated tax liability is outstanding.

     

    $5m in cash is being held in escrow following the PMC-Sierra transaction.  There is a minimal option and restricted stock overhang.  The securities portfolio is mostly (~75%) short dated (0-3 years) corporates and agencies.  Remaining rent obligations are $2m and remaining purchase obligations are $3m, but these will be negotiated down to match the runoff business.  Expected severance and benefits are $3.7m of which $2.3m was recorded in the fiscal first quarter (to July 2010).  Current assets (small receivables, prepaid expenses), property and equipment and other long term assets (investments in 2 VC funds) are on the books for ~$20m - roughly equivalent to total payables, other accrued liabilities, and other long term liabilities (mostly taxes).

     

    There are several reasons to believe that the time horizon for a purchase is shorter rather than longer.  Steel is beholden to its investors, especially after trying to convert to a public partnership following steep losses and redemptions at the end of 2008.   ADPT took $10m of impairments in the last quarter, accelerating losses and creating tax assets.   The latest filing also announces the intention to put the building up for sale at the end of the year.   The tangle with the SEC and Steel's large equity holding mitigate the risk of value being shuffled out the door.   The fact that Steel is buying shares for its own account, rather than retiring them with ADPT's money, every time the share price dips below $3 is a positive.

     

     

    Catalyst

     As described above

    Messages


    SubjectCOSN ...
    Entry08/18/2010 09:13 AM
    Memberjohn771
    If this company were going to liquidate then i would love the idea, but "the opportunity to invest with Steel" may deserve a discount.
     
    Steel has controlled COSN for 6 years without finding any place to deploy its cash and realize value from its NOL.  How long are you prepared to wait in ADPT?
     
    Is it reasonable to attribute value to a tax NOL in the absence of any income generating business?  Even if ADPT were able to enter a profitable business, the benefit of the NOL would be realized over many years so the NPV of the NOL is significantly lower than its face value.

    Subjectliquidation
    Entry08/18/2010 11:03 AM
    Memberheffer504
    I agree with John.  I've looked at this before and concern has been what they do with cash.  Good to see that legacy biz has been sold.  Is there any indication of liquidation (like SOAP)?  SOAP had approx $25/shr in NOL's but liquidation was the best option for s/h's and mgmt should be given a gold star for that.
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