Description
I am long shares of Sycamore Networks (SCMR), a voluntary liquidation with 28.8mm shares outstanding. It’s key assets include $0.41 per share of cash, $0.09 per share of land sale proceeds (co expects to complete sale on or about December 31, 2014), and $29.64 per share or $856mm of federal net operating loss (“NOL”) carryforwards. This situation offers safety of principal (buying cash at a discount), near term catalysts and significant upside optionality. This idea is limited to small funds and personal accounts due to size and section 382 limitations.
Why this situation exists
I believe this situation exists due to low price nature, small size, investor fatigue, uncertainty around potential action to monetize the NOL and investor inclination to use funds elsewhere in light of market’s positive momentum / making all time highs - exactly the time in which I prefer to be investing in absolute return, short duration type opportunities.
Sycamore brief corporate history
Sycamore was founded in 1998 by Dan Smith and Gururaj Deshpande. Sycamore's niche was helping network operators manage their fiber optics more efficiently. Sycamore went public in 1999 and shares more than quadrupled on their first trading day, valuing the company at $14 billion. At the time, it had booked a total of $11 million in revenue and no profits. It soon became apparent that growth forecasts for Internet traffic were overstated, and there were too many companies competing for limited dollars to be spent on network equipment. Fast forward to January 29, 2013 when shareholders approved the liquidation and dissolution of Sycamore pursuant to the Plan of Dissolution.
Could the residual NOL stub have value?
If the Board determines that liquidation and dissolution are not in Sycamore’s best interests and the best interests of Sycamore’s stockholders, the Board may direct that the Plan of Dissolution be abandoned or may amend or modify the Plan of Dissolution to the extent permitted by Delaware law without the necessity of further stockholder approval.
Potential catalyst
Next catalyst could be 8k filing detailing completion of the previously announced land sale, sale of equity stake in Tejas Networks, final cash distribution and cancellation of plan of dissolution in conjunction with section 382 poison pill to protect the company’s NOL. Near term, I believe this could set up similarly to the following situations:
Affymax (AFFY). On 11/26/14 announced plan to protect $481mm NOL carryforward, distribute excess cash to shareholders and put in place new CEO with mandate to identify and acquire one or more income producing assets. Affymax (AFFY) shares were up 100%+ on the announcement.
WMI Holdings (WMIH). Upon announcement of KKR to make strategic investment in the company in aim of monetizing the shell comapany’s NOLs, shares were up almost 200% over following few trading days.
Closing thoughts / Speculation
While there are a number of directions the company could go in the event they do make effort to monetize the NOL, seems like an acquisition of privately owned Tejas Networks could be possible scenario. Gururaj Deshpande was founder of both companies, owns 15.8% of Sycamore Networks and is Chairman of Tejas Networks. Since its inception in 2000, Tejas Networks has attracted $73 million of funding from Intel Capital, Mayfield, Battery Ventures and Goldman Sachs, which put in $24 million.
Loss company primers
For excellent background on similar situations please see VIC writeups on Clarus (CLRS) by Matt366, MyRexis (MYRX) by ElmSt14 and HC2 Holdings (HCHC) by dichotomy.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Completion of the previously announced land sale, sale of equity stake in Tejas Networks, final cash distribution and cancellation of plan of dissolution in conjunction with section 382 poison pill to protect the company’s NOL.