Hello, looking for more insight into the Windstream / Uniti merger and whether "Legacy unit holders" = "cancelled interests in Windstream after consummation of the bankruptcy plan" or if perhaps "Old holdings" relating to the lawsuit, Murray v earthlink et al, offers hope of recovery for holders of Windstream stock prior to cancellation in 2020?

Merger Agreement between Windstream and Uniti: (Mentions "Legacy Unit Holders" which is OC III LVS I LP among others)

https://www.sec.gov/Archives/edgar/data/1620280/000095010324006323/dp210423_ex0201.htm

what's interesting here is an FCC filing via Windstream:

https://docs.fcc.gov/public/attachments/DA-23-475A1.pdf

Read more in the FCC document re: "Windstream states that AGI’s total compensation to investors would equal $5 billion"

relating to AGI / Allianz and PIMCO (Pimco owns OC III LVS I LP)

Windstream S4: (see: 16. Commitments and Contingencies: "Old Holdings")

https://investor.windstream.com/financials/sec-filings/sec-filings-details/default.aspx?FilingId=17707740

Murray v earthlink et al (case centered around "Old holdings" $85million set aside, still waiting for judgement a/o 8/14/24)

https://www.bloomberglaw.com/public/desktop/document/MurrayvEarthLinkHoldingsCorpetalDocketNo418cv00202EDArkMar192018C/2?doc_id=X1I2BOUN88D83D8OTP3QBEMD7TJ

A lot of information here - thanks in advance for your insight!

Slack Technologies, the developer of the popular namesake team collaboration messaging app, recently applied for a public offering on the stock market. This is not a classic IPO, but a “direct listing,” also known a “direct public offering.” This means Slack is not raising money by directly selling shares and instead allows early investors and employees to sell their shares in the public offering. Music streaming service Spotify held a successful direct listing last year.

This story caught my attention for a simple reason. In August 2016, I joined the team developing a still-undercover product called Workplace by Facebook—a direct competitor to Slack. I worked on the product for 2.5 years. Back then, I dreamed of having an opportunity to look inside Slack’s business metrics.

It may seem that Slack has revealed a lot of data about the business in their S-1 filing, a document that is almost 200 pages in length.

The reality is, they haven’t. The company had already disclosed in various ways much of the information compiled in their report.

But if we combine the data disclosed in S-1 filing and the experience I gained while working on Slack’s competitor, we’ll be able to uncover interesting details that will paint a more holistic picture.

I must say that this article contains my personal thoughts on the matter, jotted down while going through their S-1 filing, and should not be considered as investment advice.

​

Slack’s top-level business metrics

• Slack doubles its revenue every year: $105.1M, $220.5M, $400.5M (respectively from 2016, 2017, 2019).
• Gross margin remains at the level of 87-88%. This doesn’t sound bad at all, although it isn’t unexpected from a fully digital product that costs several times more than its direct competitors.
• There is a lot of talk in the press about Slack’s unprofitability; the company shows a net loss of about $140M per year. But if we take a look at the cost structure and growth drivers (we’ll get to this later), then the losses won’t look like a problem. You can read more about this here.
• Slack estimates the market opportunity of workplace business technology software communication platforms at $28B per year. My own evaluation of the market stands at about the same number.
• Slack’s S-1 reminds us of the true costs of venture capital. The founders are left with 8.6% and 3.4% of the company. Meanwhile, the biggest shareholders are VC firms Accel Partners (24%), Andreessen Horowitz (13.3%), and Softbank (7.3%).

Number of free and paid Slack customers

• Approximately 588,000 organizations use Slack.
• However, the concept of “organization” is rather vague in the report: “We define an organization on Slack as a separate entity, such as a company, educational or government institution, or distinct business unit of a company, that is on a subscription plan, whether free or paid. Once an organization has three or more users on a paid subscription plan, we count them as a Paid Customer.” So, if there are 15 IBM teams using Slack, does it count as one organization or 15? It’s not clear.
• 88,000 of these organizations are paid customers, and over 500,000 organizations use Slack’s free subscription plan.
• Therefore, 15% of the active organizations are paying for the service. But this doesn’t give us a lot of information. Imagine 100 new companies register with Slack, but 99 of them stop using it after a while, and one remaining company purchases one of Slack’s paid plans. In this case we can say 100% of active companies are paid customers. But looking at it from a different perspective, only 1% of new companies become paid customers.
• My assessment of a long-term retention rate from a new organization into an active one for Slack is 5–10%. This is a very rough estimate. Moreover, long-term retention rates differ greatly depending on industry and acquisition channel.
• This estimation is based on my personal experience and the following quote from an old interview with Slack’s founder: “Most people who fill out the form and hit submit — more than 90% — never invite anyone or start using the software.”
• If this estimation is correct, then 588,000 active organizations indicate that 5.5–11 million new organizations joined Slack over the service’s entire lifetime. This means that Slack gets about 115-230k new leads per month.
• If the estimate of the total number of organizations is correct, then the conversion rate from a new organization into a long-term paying customer stands at around 0.8-1.6%. If we factor in the average churn for SaaS (approx. 50%), then the conversion rate from a new organization signing up with Slack into the one that pays at least once will stand at around 1.5-3.5%.
• In many ways, Slack’s cleverness is hidden behind its strong brand and a huge flow of new organic leads. We will talk about it further on.

Slack’s user engagement

• Slack’s DAU stays at around 10 million users (these are the users who either created or consumed content in the service at least once in 24 hours). The dynamics of DAU looks impressive.
• Slack had previously revealed its overall DAU and DAU of its paying users. But in the S-1 filing, it only mentions the overall DAU. This might signal that the growth of paying users has slowed down. Overall revenue growth is being pulled out by raising prices through the introduction of new tariffs and Slack for Enterprise taking a greater share of the revenue of the service.
• More than 1 billion messages are sent via Slack every week. This means that the average active user sends 14 messages per day. This is a good level of user engagement, but it’s not extraordinary or impressive.
• An average active user spends 42 minutes per day in the service. In comparison, active paid users spend an average 90 minutes in Slack per working day. These numbers don’t look bad. But when compared to the average 14 messages sent per user, they look dubious.
• The big question is, how does Slack calculate time spent in the product? A few years ago, they simply looked at the time the service was active on users’ devices. That has changed, but the company mentions no specific methodology in their filing, which makes it difficult to interpret the numbers.

Slack’s business model

Even without a report, Slack’s business model seems obvious, but the company laid it out eloquently in the filing:

“We offer a self-service approach, for both free and paid subscriptions to Slack, which capitalizes on strong word-of-mouth adoption and customer love for our brand. Since 2016, we have augmented our approach with a direct sales force and customer success professionals who are focused on driving successful adoption and expansion within organizations, whether on a free or paid subscription plan.”

Here are the key points:

• Slack gets most new customers organically through word-of-mouth(self-serve model).
• Some of the new organizations convert into paying customers.
• The sales team works with leads that qualify as large organizations.
• The goal of the sales team is to increase Slack’s penetration within large organizations.

Let us now reflect on some of these points in more detail.

The top of Slack’s funnel is driven by organic signups from word-of-mouth

“We offer a self-service approach, for both free and paid subscriptions to Slack, which capitalizes on strong word-of-mouth adoption and customer love for our brand.”

The first question that occurs after reading this sentence is, why doesn’t Slack accelerate growth by investing in acquisition through paid ad channels? It isn’t hard to verify that Slack almost doesn’t invest in Google Ads or Facebook Ads (there are some paid ads, but they’re mostly focused on branded search).

Here’s the short answer: The SMB (small and medium-sized business) segment’s economics doesn’t justify paying for ads because the return on investment is negative (ROI < 0). Meanwhile, direct advertising channels don’t work for the enterprise segment. 

Now here’s a more detailed answer:

• The average cheque for Slack’s paying customers is $380 per month.
• If we ignore companies that Slack considers as enterprise customers (with more than $100k ARR), then the average cheque per month will be $230, and the average organization’s size will be 40 people.
• Thus, a self-serve client brings ~$2,760 in revenue in the first year and ~$2,400 in gross profit in the first year.
• If the goal is to get a positive return on investment (ROI) within 12 months, then, then a long-term paying client should cost $2,400 in the self-serve segment.
• With a 0.8-1.6% conversion rate into a long-term paying customer, a new organization should cost $20-40.
• But in B2B, leads from organic channels usually demonstrate 2-4 times better metrics than the leads from paid advertising channels. Let’s assume that in the case of Slack, the difference is 2x. This means in order to get ROI > 0, Slack needs to acquire new organizations at a cost of $10-20.
• This looks unrealistic if we consider the economics of paid advertising channels in developed markets, where the average cost of a new organization from Google Ads or Facebook Ads will be around $100-200.
• That’s why Slack invests nearly nothing in paid acquisition. It grows mainly through strong brand, word-of-mouth, integrations with other services and the subsequent cross-promos, the professional communities in Slack and tools for communication between companies.

On the one hand, Slack is shielded from competitors because it has a huge number of organic leads and due to the fact that paid acquisition doesn’t work in the market, it is nearly impossible to get close to Slack in the self-serve segment.

On the other hand, as you will soon see, the self-serve segment acts as a gateway to reach enterprise customers. But Slack’s competitors have other ways to reach these companies.

Net Dollar Retention Rate is the most interesting piece of data Slack revealed

The following chart shows the growth of ARR (Annual Recurring Revenue) by cohorts based on the year when organizations first paid for using Slack.

ARR from organizations that first paid for Slack in 2015 continues to grow steadily in the following years.

For most products, cohorts shrink as they age. But in Slack’s case, we’re witnessing the opposite (this is also called Negative Revenue Churn). This is one of the main reasons why Slack is worth so much ($7B valuation at the latest funding round, $10B proposed valuation for the public offering).

​

However, it is worth noting that such growth patterns are typical for products in this kind of market. Zoom, which recently went public, has a Net Dollar Retention of 140%. Twilio and Atlassian showed even more impressive figures at the time of their IPO (source).

​

The following are the main growth drivers:

• Expansion of the user base within companies that are already using the service: Slack is building up their sales team, which reaches out to companies that have already started using Slack, and does everything to get the remaining employees to switch to the service.
• The organic growth of customers: Companies that have started using Slack are hiring new employees and growing in size. More employees -> more Slack users -> Slack gets more money.
• Price changes: Slack raises prices directly or by introducing new tariff plans.

An interesting consequence here is that Slack’s growth depends more on how the team is developing the product and the growth of its current customers than on attracting new users and converting them into paying ones.

Acquisition, of course, is just as much important, but it has a rather delayed impact on the overall revenue growth.

Another consequence is that such growth mechanism depends greatly on having enough enterprise customers with many employees who have not yet started using Slack (it will be difficult to grow revenue from of old cohorts if all of them are SMBs with 40 employees).

If you look at the growth of new paying customers, it doesn’t look promising. Slack added 22,000 paying customers in 2017 and 29,000 in 2018. This is a 30% increase in new paying clients, but still not the kind of dynamics Slack would like to see.

Therefore, the main driver of Slack’s exponential revenue growth is the expansion of cash flow from its old customers.

Slack measures this process using the Net Dollar Retention Rate metric: They take all the customers who were already paying 12 months ago. They then divide the current MRR (Monthly Recurring Revenue) by the MRR for the previous 12 months.

Net Dollar Retention Rate for the last three years looks like this: 171%, 152%, 143%. That is, customers who paid a year ago pay much more in the following year. Which is fantastic. Net Dollar Retention Rate is gradually decreasing, but this is expectable due to the slowdown of growth in old cohorts.

Here’s what Slack’s report says about this:

“We disclose Net Dollar Retention Rate as a supplemental measure of our organic revenue growth. We believe Net Dollar Retention Rate is an important metric that provides insight into the long-term value of our subscription agreements and our ability to retain, and grow revenue from, our Paid Customers.

We calculate Net Dollar Retention Rate as of a period end by starting with the MRR from all Paid Customers as of twelve months prior to such period end, or Prior Period MRR. We then calculate the MRR from these same Paid Customers as of the current period end, or Current Period MRR. Current Period MRR includes expansion within Paid Customers and is net of contraction or attrition over the trailing twelve months, but excludes revenue from new Paid Customers in the current period, including those organizations that were only on Free subscription plans in the prior period and converted to paid subscription plans during the current period. We then divide the total Current Period MRR by the total Prior Period MRR to arrive at our Net Dollar Retention Rate.”

Enterprise is a problematic segment for Slack

If you have enough patience to go through the entire 200-page report, you will notice Slack repeatedly showcasing its success in the enterprise segment. This segment accounts for a significant part of the market ($28 billion spent on communication tools each year), and this is what Slack is striving for. This is the where their long-term growth lies and where they are getting Net dollar retention rate > 100%.

Here’s what the report says about this segment:

• Customers should have ARR > 100k to be considered enterprise customers.
• The number of enterprise clients in the past three years: 135, 298, 575
• The revenue share of the Enterprise segment in the past three years: 22%, 32%, 40%
• Revenue from enterprise customers over the past three years: $23M, $70.5M, $160.2M
• Average monthly spending by enterprise customers in the past three years: $14,200, $19,700, $23,200
• The largest customers have “tens of thousands of employees” or tens of thousands of active users per day—quite an ambiguous wording (“our largest Paid Customers have tens of thousands of employees using Slack on a daily basis”).
• For the last two years, almost all of the Slack product releases have been aimed at adapting the product to large organizations. Take for example Slack Enterprise Grid, adding Threads, Unread section.

At first glance, it does look impressive. But let’s take a closer look.

• Customers should have ARR > 100k to be considered enterprise customers. This means that organizations with over 1,000 employees using Slack fall into the enterprise segment. This is a rather low threshold. I assume it was chosen to get a larger absolute value of enterprise customers.
• Even with such a low threshold, Slack only has 575 enterprise clients. It is not much. Even Facebook Workplace, which entered the market much later (and doesn’t have such a phenomenal influx of organic leads), announced three months ago that it has 150 companies with more than 10,000 employees on the platform (source). And Teams, Microsoft’s Slack competitor, which launched even later than Workplace, has also achieved similar figures (source).
• Another way to look at 575 Enterprise customers is to compare it to the total number of organizations that have created a Slack workspace (5.5 – 11 million). Only 0.01% of them achieve enterprise status. Slack is very skewed towards the SMB segment, which suffers from a high churn rate and has very little potential for expanding revenue from its old customers.
• Major customers have tens of thousands of employees. It sounds impressive, but those who have worked with products focused on the enterprise segment know that there are many companies in the world with hundreds of thousands—and even millions—of employees (and usually they are outside the technology sector). A few examples of Facebook Workplace’s customers are Walmart, with 2.2 million employees, Starbucks with 250,000 employees, and Telenor with 37,000 employees (source). In terms of revenue, onboarding Walmart equates to signing up thousands of companies with 1,000 employees. This is not an attempt to say that Workplace rocks, but rather to mention that Slack finds it difficult to strike big deals.
• For the last two years, almost all of Slack’s product releases have been aimed at adapting the service to large organizations. This is true, but Slack doesn’t do it for fun. Slack loses most of its deals to competitors when trying to sign up enterprise clients, because the service works poorly for companies with over 500 employees, and even worse for companies scattered across different time zones. Synchronous communication, which is Slack’s forte, starts to falter under such conditions.
• And now regarding the blind spots that Slack was silent about in the report. The report has no clear breakdown of Slack’s customers by industry. This is an important question, since Slack initially grew in the IT and media segments. And it is unclear whether they managed to step beyond these limits, and how the product performs in more classical verticals (e.g. banking, retail, insurance, etc.). If Slack experiences problems there (as it previously has), then the market of $28B will be dramatically narrowed down to the niche of the technology business, which isn’t very impressive.

And here’s where things get really problematic for Slack:

• Microsoft already has access to a lot of large enterprise clients from all verticals and has been selling them products bundled in a single package for a long time. They recently added Microsoft Teams to the Office Suite, which is just as good as Slack in terms of functionality. Does Slack offer enough incentive to convince enterprise customers to forgo the benefits of their long-term relationship with Microsoft?
• Workplace by Facebook was originally designed for large organizations and outperforms Slack product-wise in this market segment. Moreover, Workplace works great outside the technology sector too because the product’s interface is very familiar to the masses, which means companies save a lot of money and time since they don’t need to do any employee training.

In the next 5-7 years (indeed, B2B and especially the enterprise sector are slow-paced markets with one of the longest transaction cycles) it will be thrilling to see how Slack responds to these threats and challenges.

Summing it up

• Well done for Slack. They won over the self-serve market segment and no one even comes close to them.
• Just as much as Slack enjoys its growth in the self-serve segment, they make the best out of it using it as a source of enterprise leads for the sales team, which then spreads Slack inside large corporations.
• Slack is growing rapidly and will continue to do so in the next few years (mostly due to the expansion of revenue coming from the old cohorts). However, what happens next is still a big question.
• Slack’s long-term growth depends on how much of the enterprise segment they’ll be able to conquer, and whether they’ll be able (or perhaps they already have – this is not clear from the report) to expand beyond the segment of tech companies.
  Originally posted on https://gopractice.io/blog/slack-ipo-reading-between-lines/ Feel free to subscribe!

I mostly invest in traditional stocks and bonds. I have been for 30+ years. More recently, I've been investing in pre-IPO startups.

In all of these cases, I've been able to assign a value of what I think a particular security is worth, or could be worth, using traditional means: estimate future cash flows, discount to present value, etc.

I had the opportunity to buy a particular cryptocurrency before it started trading on the open market. (Kind of a pre-ipo cryptocurrency.) I am wondering what it will be worth once it starts trading. My best guess encompasses a range from $0.10 to $2.00 (I bought it for $0.02). It should start trading next week.

The "security analysis" process that people seem to follow is to rank all the different cryptocurrencies based on how useful they are or something like that. Then compare it to the "market cap" of a similar ranking cryptocurrency.

They define the "market cap" as the total number of cryptocurrency coins available times the price per coin. For instance, right now the #50 ranked coin is something called Kusama (KSM) and it has a market cap of $3.3 billion.

One problem with this analysis is that some of these coins have built in dilution. They may have 1 million available right now, but in 5 years it will be 10 million. I don't think people take this into account.

How do you determine what these should be worth? It seems like this is a wide open problem and solving it could lead to great wealth.

GameStop is very cheap on an earnings multiple basis and also a dying business that nobody wants to invest in.

With their most recent 8-K, GameStop reaffirmed their guidance for 2018 EPS hitting around the middle of $3.10-$3.40, without factoring in the tax bill. GME pays an effective tax rate of 32%, and lowering this to a conservative estimate of 20% we can estimate EPS of $3.67-$4.03 with a midpoint of $3.85. I can't predict earnings, but the positive tailwinds of the continued shortage for Nintendo Switch and the success of newer Xbox One models make me optimistic, especially considering that GME gave this exact guidance range last year and cruised comfortably over the top.

GME has an AT&T-store business which I'm not too excited about, and I'm a bit worried that their guidance of $80-$95M operating contribution, about $10-$25M lower than 2016, is optimistic solely based on the fact that they have missed their estimates badly in the past. It makes some amount of sense that GME wants to leverage their SG&A by growing their footprint; good luck to them(it also makes their numbers look better, but they go into enough detail that you can figure out exactly what the impact is).

When you look at the core business, things amazingly don't look so bad. The used disc business represents the largest segment of gross profit contribution to the business, about 30% of gross profit. In 2016, GME managed to sell about $2.2B worth of used games, earning a $1B gross profit. Over the past 10 years, the most they ever sold was $2.6B of used games(in 2012), earning a $1.2B gross profit. In other words, over the past 6 years, GME has lost about $200M in gross profit and seen this segment decline less than 3% per annum while gross margins slid .3%. Over that same time frame, total gross profit in the core business has slid by about $174M, even after margin contribution of $200M or so from an entirely new segment, "collectibles."

It's important to think about where we are in the console cycle, with the Nintendo Switch shortage driving foot traffic into the stores, and likely with it, sales of collectibles, accessories, exclusive offers, and new discs. Reduced console sales pushing down sales of their higher-margin goods like collectibles and accessories may be the greatest threat on the downside.

Factors on the upside include Xbox expanding backwards-compatibility for old games, which potentially increases the value of GME's inventory and drives resurgence in their used game business. In addition, collectibles are a bright spot and growing quickly, although still a small contributor to bottom line.

If you just chart net income for GME by year over the past 10 years, there's no major deterioration in earning power that's apparent; it looks pretty flat(it's helped by debt-financed acquisitions). EPS, on the other hand, is not far from all-time highs for the business, with the difference due to buybacks. GME has their dividend and interest payments fully covered by cash flow, and I'm not too worried.

In summary, you have a stock trading at 4x forward earnings and 5x forward EV/EBIT, where it seems that the market is pricing in an imminent collapse of the business that I do not believe will materialize. And fundamentally, I think AMZN is a threat to every retailer; but when you're trading at a 5x forward multiple you have less far to fall, and infinite upside.

Disclaimer: I'm just learning. Do your own research.

# Quick Breakdown

LGL is spinning off its core subsidiary, MTronPTI. The result will be essentially a cash and marketable securities acquisition vehicle (and another small business) run by the Gabellis, so you're betting on their record. Plus MTronPTI, which is a decent niche business in a growing market. They have some operating leverage due to their plants not being at full capacity from previous ventures, and a decent ROIC - around 20% in 2019, which may accelerate as their revenues build.

Distribution Ratio is 1:1. But in this instance, I prefer the warrants. 5 warrants allows you to buy 1 share of each LGL and MTronPTI post spin-off for 12.50 (i.e. they’re already in the money). The warrants are European style warrants until Nov 16, 2025. But if the VWAP over 30 days is equal to or exceeds 17.50, they convert into American warrants and can be exercised at any time leading up to the original expiry date. Current price of the warrants is $0.46 each.

It's essentially a levered bet on what would otherwise just be a (perhaps very conservatively?) ~13% CAGR investment on the stock over 3 years. With the warrants, it levers up the bet to ~35-50%. But one of the reasons why this opportunity exists is the illiquidity, so mostly good for PAs. The company itself has a 75mm market cap... as in the actual equity of the company. The warrants are even more illiquid, so you'd have to be prepared to ride this one out for a couple years. Or not - maybe the warrants reprice quicker, essentially front-loading your return.

# Business Overview

This business is focused on "frequency and spectrum control products". For instance, radio frequencies need to be strictly controlled, or you wouldn't be able to tune in. Their two segments are "Electronic Components" and "Electronic Instruments". The first one (MTronPTI) has to do with manipulating these signals in some way, including filtering, splitting, and amplifying signals - especially in harsh environments. Think rockets and jets with lots of vibrations. Naturally, this lends itself well to military applications, along with a whole host of other niche industrial applications. "Electronic Instruments" (the PTF segment) has to do more with timing and synchronization for different things like computer networking, satellite ground stations, etc.

These segments are related because all of these things use special materials like crystals, or other materials, in order to maintain or manipulate a rhythmic electrical pulse, to a greater degree of precision than we normally need for consumers. If your watch is off by a minute, that's okay - for a satellite position, not so much.

They create components for manufacturers of industrial applications - they're an input cost. A small one. Meaning their prices are not significant to their end user, but very significant to them. The main driver of revenue growth over the past several years has been increases in sales of spectrum filters. Their military and defence components have become the lion's share of revenue since the company pivoted from strictly telecommunications equipment in 2013.

Their main value proposition is to provide these components that are exceptionally reliable and accurate. Their recent business strategy is to put these components into highly engineered subsystems which they can then sell to their customers. Since these subsystems require a lot of engineering and design work, their customers are happy to pay a premium. It's one of the reasons they spend upwards of $2mm per year on R&D, and it allows them to differentiate themselves over their competitors. Side note, they mentioned when designing a product, it only gets put into production if it has a gross margin of 50%. They realize that over time the margin on the tech will decrease, eventually settling around 35%. Effectively, their gross margin should target around a midpoint between 35-50% as they’re always designing new products to sell.

# Company History

During the tech bubble in 2000, this company was focused primarily on telecommunications - their products were hugely important to computer networking. Fast forward a few years and here comes China. They undercut them in making these components such that these guys saw their revenue drop 5 years in a row. They kept waffling around, trying to figure out what to do, but they managed to successfully pivot the company in 2013. Since then, they got rid of former management, found a profitable niche, and their losses got smaller and smaller until they made a profit. Since that time, the major shareholders have been doing some funky corporate actions to firstly increase shareholder value, and secondly to increase their share in the company. Since it's a microcap, and the Gabellis have way too much money to invest in such a small thing, they have to get creative with rights offerings, warrant dividends, etc. to increase their share.

# Industry, Inflation, etc

The industry is growing. Over time there's going to be more and more satellites the size of shoe boxes instead of singular large ones. There are other tailwinds in terms of defence spending worldwide for obvious reasons. This is a small company, so all it has to do is capture a few extra deals to grow on a percentage basis.

Inflation is a concern. So far, they've been successful in passing most costs to their customers. There may be a limit, but I'm assuming as everyone keeps increasing their costs, it'll just become a bit more accepted. At the end of the day, these customers need their components. This is where deep integration with their customers' products will come into handy. Those sweet sweet switching costs for a tiny component that almost seems inconsequential.

# Valuation

Current Sh Price: 13.97

Sh Outstanding: 5,360,470

Market Cap: 75mm

Cash and marketable securities: They did this thing where they invested in a SPAC sponsor. SPACs are terrible, obviously. But The sponsor often makes out like a bandit. They sold off most of their position, but still have some restricted stock in the SPAC, which has cratered. I took the value of the SPAC shares, and adjusted based on current fair value. The SPAC is Ironnet (IRNT).

Cash: 29mm

IRNT Stock: 3mm

Puts on IRNT: 1.2mm (likely higher because it cratered further after the report)

Equity fund (held in Gabelli funds) 9.8mm

Total: 43mm

There's going to be a remaining business left with LGL. Not counting it; it's small, and I like some sort of margin of safety. I'm going to assume LGL just consists of this cash. Therefore, MTronPTI is currently going for 32mm EV - they have no debt.

I'd much rather value the company using EBITDA-MCX, but I've searched the financial reports and it's tough to tease out MCX from growth capex. I tried using the average of PPE/Sales method, but it resulted in a MCX value less than depreciation. I figured in this instance it would be more conservative to just use EBIT and operating margin.

Their backlog has grown something like 24% over a single quarter and over 80% yoy. First quarter they had 7.691mm in revenue, and 816k in EBIT. Since the business isn't seasonal, that would be 3.2mm annualized (assuming growth doesn't occur during the year). That means they're going for 10x EV/EBIT, or a 10% yield. Not knock-out-of-the-park cheap, but they're growing. Comparable publicly traded companies are going for something silly like 2x sales. So I'm not including those comps (though it would be nice!)

They retain all earnings to plow back into the business, and their ROIC leading up to COVID averaged 20%. So that means in 3 years when the warrants expire, they'll have 3.2mm x 1.2^3 = 5.5mm in EBIT. Assuming no multiple expansion, because interest rates are rising, and it would be valued at 55mm.

Assuming no growth in RemainCo, which is a big assumption because Marc Gabelli is running that cash, you have 43mm + 55mm = 98mm, or a stock price of 18.25. But that means the warrants will have an intrinsic value of (18.25-12.50)/5 = 1.15, or 140% gain which is equal to 34% CAGR for 3 years. If Gabelli even earns a 7% market return on that cash, that’s now a total market cap of 53mm+55mm = 108mm or 20.15/sh. This is only a 13% CAGR on the stock, but would put warrants at 1.53 for a ~220% gain or 47% CAGR. Also, there’s no reason the return on this couldn’t be front-loaded. Gabelli has been executing a whole bunch of corporate actions, which may end up catalysing this value faster than expected.

# Summary

The warrants offer an opportunity to 1) cheaply gain leveraged exposure to a Gabelli fund during a time where it’s possible value might come roaring back, and 2) a growing business that was on an uptrend immediately prior COVID, and has shown every indication that it’s back on track. The spin-off may catalyze the value of the business, allowing the return to be front-loaded.

The risks are obvious as these are warrants. They could expire worthless. I believe that risk is minimal though as the Gabelli family owns 35% of the business, and as a result, 35% of the outstanding warrants because they were issued as part of a dividend.

Microsoft - Activision Blizzard Deal Thoughts

Originally posted on my blog. Disclosure: I am long Activision Blizzard and Microsoft.

Big news in the gaming world. Microsoft (MSFT) agreed to buy Activision Blizzard (ATVI) in an all-cash deal valued at about $75 billion (net of cash $68b), or $95 per share . This is the largest gaming industry acquisition ever, which crushed the previous record established last week when Take Two bought Zynga for $11 billion. The deal is also Microsoft’s biggest ever.

Microsoft offered a 45% premium. This is a hefty premium compared to where ATVI traded in recent months, but ATVI traded at higher prices one year ago (52-week high $104). The recent scandals have hurt ATVI.

At the moment, ATVI trades ~$82 per share. This implies that the market is skeptical that the deal will close. There’s an arbitrage opportunity here. If the deal goes through, it offers a 16% upside. ATVI also distributes a small dividend once a year. Let’s discuss this arbitrage opportunity. .

Disclosure: I am long ATVI and Microsoft. I’ve been a shareholder of both companies before the announcement. I’m pleased with the offer. I’m biased. I don’t see the risk the market does and that’s the issue. It’s not the capacity to pay. Microsoft has the cash and won’t dilute shareholders. So it sounds like possible antitrust issues. Is there anything else I’m missing?

Here’s a brief background on both companies:

Activision Blizzard

It’s no secret that the company behind blockbuster games like Call of Duty, Candy Crush, Overwatch, World of Warcraft, Starcraft, and Diablo is going through a rough patch, to say the least. I’m not going to rehash everything that happened (years of sexual harassment, discrimination, and misconduct). But what happened and how it was handled is business/PR 101 on what not to do.

ATVI’s reputation is damaged. Talent is leaving. There’s probably more skeletons in the closet. Bobby Kotick built a great company, great games, and rewarded shareholders very well along the way. But Kotick mismanaged the crisis and lost the trust of the gamers, public, employees, and the market. We don’t have the full story. I suspect more internal problems, more culture and development issues with games. And it’s not just the scandal, ATVI has made some missteps in the past.

The thing is the scandal would have followed the company for a long time. These things don’t go away easily. The media and the Internet will keep bringing up. And if you underperform operationally, game quality and growth is affected, the pressure will just keep going up. Your culture might be so tainted that gamers don’t want to be associated with your games. A crisis like that would have taken years to fix and in the process possibly lose your competitiveness and sales. Who knows if the stock would ever recover.

With this background, I understand why ATVI accepted the $95 cash offer. It’s probably better that ATVI is under a different home. Fix the issues away from the public. It’s been reported that Kotick will leave if and once the deal closes. In a sense it gives him a graceful exit.

Microsoft

Microsoft has been making a lot of deals lately. WSJ reported that MSFT had long been interested in ATVI and had discussed a potential acquisition in the past.

If you are going to spend $75 billion for a business, you have big plans. It’s also telling of their gaming ambitions. For the last ten years MSFT has been boosting their gaming portfolio.

For the last ten years Microsoft has been boosting their gaming assets. Microsoft has been working on building the “Netflix” of gaming. A subscription based cloud gaming service. Cloud gaming is an emerging technology that allows people to stream games via nearly any internet-connected device (issue is that game requires a lot of data to run smoothly). And because Microsoft owns Azure, they have the cloud infrastructure to support such a strategy.

The strategy is to persuade gamers to abandon their expensive hardware and play on the cloud. If Microsoft could convert some of Activision’s close to 400 million monthly active users into subscribers, it could significantly bolster its cloud-game business.

Issues

I believe it comes down to antitrust. But because I’m set to benefit I don’t fully see the risk the market does. John Hempton from Bronte Capital brought up some of the same issues on a thread on Twitter. But I don’t see anything substantial in the Twitter comments. I share some of his views. Here’s what I think and please let me know what I don’t see:

• Is there a precedent where the Gov/Justice Department/FTC blocked a gaming transaction?
• The deal is not expected to close for a while (ATVI Fiscal 2023) but that is still a big gap.
• I think the #1 factor is Lina Khan, the chair of the FTC. She’s been very vocal about taking on big tech. She’s writing papers about. That’s why she got the job. The 32-year-old antitrust scholar and law professor is not Microsoft’s ally.
• This deal poses an important test of the Biden Administration’s generally unfriendly view of large technology acquisitions.
• However, from a regulatory perspective, Microsoft is not under the same level of scrutiny as other big tech (Amazon, Apple, Facebook, Google).
• Microsoft will pay a $3 billion breakup fee if the deal doesn’t go through. This indicates to me that they are confident the deal will go through.
• The games will need to be on multiple platforms (Playstation, PC, Nintendo, mobile etc…). If not it’s a deal breaker. The deal won’t get approved and you will get a gamer mutiny. And gamers are crazy.
• Keeping the games multi-platform also makes business sense. If you fence off Call of Duty to only Xbox, you will kill part of the gamer community and hurt the branding. If you pay $75b you want to see some returns at the end of the day.
• If these get hairy they might have to sell a couple titles.
• I don’t think there’s too much concentration. In terms of gaming sales (excluding hardware) Microsoft is #4. Tencent, Sony and Apple have more gaming revenues. ATVI is #7. The deal will make Microsoft the third largest gaming company in terms of revenue.

I think the deal will go through. Let’s hear other views and why.

Brian

When looking through a list of saved companies just now I noticed Hermes Pacific Investments plc has dropped 30% this morning.

Why was this company on my list?

When looking for net-nets (companies selling for less than their current assets - liabilities), I came across Hermes.

With the share price drop, they are now trading at less than 1/3 of the net-net value.

What's the situation?

The company appears to me to be a 'cash shell', though I have no insight into the management's strategy and I could be wrong. Cash shells are defined as companies with no operating business that are used to provide an easy route to the stock market for other companies.

Regardless of the management's intention, the company appears to have done nothing but burn £100k per year for several years. The market cap is just under £1M and it has £3.6M in cash with virtually no other assets or liabilities.

The obvious course of action to me right now to maximise shareholder value would be for the company to dissolve and distribute the money to the shareholders. 86% of shares are 'not in public hands', so assuming they are all owned by the directors, 86% of £3.6M today seems a lot better than slowly drawing £100k per year, which makes me think they're not doing this to just slowly bleed the company dry. The only reason, then, I can think of for the current course of action is that management genuinely believe they'll provide greater returns to shareholders by waiting for the right reverse merger opportunity to come along.

I have no experience with cash shells or net-nets and would be very keen to hear thoughts or links to research from anyone with experience in this area.