Any thoughts on my first original stock idea?

[almostbusto]

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A $30M company where the top dude was paid $1M last year? And his father(?) was paid $200K. And they're all also CEO's and CFO's and whatnot of a another teeny tiny company, TUX, with a market cap of $6M which is paying father and son $200k each. This is obviously some family and friends operation. Why should they work to do something with the >$30M in cash they have when they can just sit and do nothing at all and collect $1M/yr in paychecks? They get all of the money eventually this way as the share value goes to 0. If they sold the company or distributed the cash as a dividend, they'd only get part of it.

I'm being cynical, and management may be go-getters intent on building a company so an investment may indeed generate nice returns. But I think I'll let y'all venture into this and I will watch from the sidelines.

[/ QUOTE ]i think thats being overly cynical. the chances of them getting away with something like that are pretty much zero, based on my understanding of the law. which they are aware of. so what would a rational actor do in a situation like that? i would suggest that actor would maximize benefits by maximizing the companies benefits, more or less, given that he owns a 50%+ stake in the company.

[KDuff]

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i think thats being overly cynical. the chances of them getting away with something like that are pretty much zero, based on my understanding of the law. which they are aware of. so what would a rational actor do in a situation like that? i would suggest that actor would maximize benefits by maximizing the companies benefits, more or less, given that he owns a 50%+ stake in the company.

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We've laid out a lot of issues you should consider.

Why would Enron, Worldcom, Qwest, Tyco, et al commit fraud when they were high flying, highly scrutinized companies?

This company is well under the radar and minority shareholders probably don't have big enough stakes to provide enough oversight. The board and management are very close.

Make sure to carefully read the quarterly and annual reports (before they sold their 50% interest) to see what they were really doing.

[DesertCat]

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This could be an example of a value trap.

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What's that?

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Value traps are companies that seem very cheap, but stay very cheap. Typically they are asset based valuations, i.e. a static company without a business or with a bad business that's very cheap in relation to it's assets.

This goes back to the Ben Graham "net net" type investments, i.e. his idea was to find a company that's trading for close to it's net cash value (i.e. liquidation value or the value remaining after all assets are sold and liabilities paid and business shut down) and get the business for free.

How can you go wrong? Well, if it's a value trap, it will stay cheap for a long time and the market won't ever take the price up to where you think it should be valued.

There are a couple solutions to the value trap.

1) Buy an entire portfolio of net-net type investments. Some will stay cheap, some will appreciate to their true value and overall your results have a good chance at being acceptable, and your risk low.

2) Buy a net-net with a catalyst, a specific action that's going to realize that value. A liquidation, or a purchase of another company, or large dividend, etc, can all count.

In this case you have the catalyst, but you also have the risk that management's motivations are not the same as shareholders. They can continue to pay themselves excess salaries for as long as they want, so they probably are factoring that into their purchase decision. I.e. buying another company may cost them a $1M+ a year in excess salaries. So the bar for a deal might be very high, and they could literally go many years waiting.

It's very similar to Kaiser Group, except that Kaiser's management doesn't control the company. A large shareholder (actually his family) has effective control (and a great reputation, unlike the WinMill guys). So far I haven't seen any signs of self dealing, and I'm still hopeful that they'll get a good deal done, or return the remaining cash. The CEO actually told me he'd make a recommendation for a liquidation if they couldn't get a deal done soon. And they just paid out about 15% of their net asset value in a dividend, apparently as a response to the requests of smaller shareholders for some action.

But if I were ever to find out that the controlling shareholders were getting substantial special payments (board fees) I would have to reconsider holding my shares any longer. You are truly at the mercy of a majority or near majority shareholder, and no matter how attractive the valuation, if they are working against your interests you might as save yourself the effort.

[Groty]

They've created a synthetic SPAC for themselves...without the pesky shareholder protections. With a SPAC, the principals don't draw a salary. And with a SPAC, they are forced to do a deal within a specific time frame. If they don't get the deal done within the time frame, shareholder approval is required for an extension. Without approval, the SPAC is liquidated and cash held in trust is distributed to shareholders.

Since they control the board, these guys can continue to draw fat salaries until its gone. This opportunity is all about extensive due diligence on the principals.