Alliance Semiconductor Corporation (OTC: ALSC.PK)

March 23, 2009 · 6 Comments

At a market value of $8.3M, the company is currently trading at an 86% discount to the net cash assets the company carried on its books as of December 31, 2008. The latest balance sheet indicates that the company is holds nearly $60M in cash equivalents and short-term investments. The company’s shares are traded over the counter, so its financial situation is not widely followed by Wall Street.

 

It is our view that the company’s intrinsic value is equal to at least its net cash value, or $1.82/share compared to its current market value of $0.25/share,  so ALSC.PK is being added to our ValueHuntr Portfolio.

 

About ALSC.PK

 

Alliance Semiconductor Corporation was originally in the business of designing and manufacturing memory and memory-intensive logic. Its product lines included Static Random Access Memory (SRAM), Pseudo SRAM (PSRAM), Dynamic Random Access Memory (DRAM), Flash Memory, and embedded memory and logic solutions. For a little while they also sold some video chipsets for PCs. However, since 2005 Alliance Semiconductor has made a significant transition from being an operating company focused on the semiconductor industry with synergistic investments in emerging companies into a holding company. In the wake of mounting losses, ALSC sold all its 3 business units (memory, mixed signal, and system).

 

In early 2006, as the result of a proxy contest, large Alliance shareholder Riley Investment Management effectively took control of the then money-losing and mismanaged company and installed Melvin Keating as CEO. Under Keating, ALSC has spent the past few years divesting assets and reducing expenses. After accumulating a sizeable cash hoard through a series of asset sales, Alliance has returned value to shareholders over the past year through a series of special cash dividends. Since July of 2007, ALSC has returned a total of $4.37 a share in cash dividends to shareholders.

 

 

Valuation

 

We estimate that ALSC’s intrinsic value at liquidation to be nearly 600% greater than the current market value, excluding costs associated with the dissolution and liquidation of the company’s assets. The company has no long-term liabilities, and minimum near-term commitments to fulfill. Additionally, nearly all of ALSC’s current assets are in the form of cash or short-term investments.  

 

 

alcs_balance

 

Catalyst

 

On September 3, 2008 Alliance Semiconductor Corporation issued a press release announcing that its Board of Directors has determined to begin proceedings to dissolve the corporation. Melvin Keating, President and CEO, noted that the company has for some time been considering whether to re-invest in another business or to liquidate and distribute its net assets to shareholders. Mr. Keating noted that the amount and timing of additional distributions to shareholders is uncertain, especially because the company’s holding of auction rate certificates will need to be monetized in an orderly manner. Bryant Riley, Alliance’s chairman, noted that since the new board took office, Alliance had sold its operating businesses and its venture capital portfolio, and had liquidated its holdings in two publicly traded semiconductor companies. To conserve cash and reduce costs, Alliance has substantially reduced its staff and the amount of office space it leases.

 

 

Conclusion

 

Alliance Semiconductors is a stock traded over the counter, so it has been widely neglected by Wall Street and the general market. Given that the company has already decided to pursue liquidation and has taken the right steps to preserve cash, we believe this is a rare opportunity where substantial returns and a high probability of realization are both present. We estimate that the company’s value at liquidation ($1.82/share) is at least 600% than the current market value of $0.25/share. ALCS has been added to our ValueHuntr Portfolio.

 

 

[Full Disclosure:  We do not have a holding in ALSC.PK. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

 

Categories: Liquidation · Net Cash · Special Situations · Value Investing
Tagged: Alliance Semiconductor, Liquidation, Net Cash, Net Net, Small Cap, Special Situations, Value

6 responses so far ↓

  • Jason // March 25, 2009 at 9:49 am | Reply

    I like your evaluation of ALSC, it’s spurred me to look into SEC filings. I agree with your conclusion, and ALSC does look like quite an investment with a substantial margin of safety. What are your thoughts on the CEO resigning back in September? I understand that the ALSC is liquidating and it significantly scaled back employees to only include 3 part time employees, but are there any underlying implications? As of 12/31/08, ALSC short term investments includes 59.4 million which I saw is entirely related to its auction rate securities. The 10-K speaks of failed auctions due to supply vs demand of it’s auction rate securities starting in 2007. While the company has not taken any impairment charges, isn’t there a possibility of future impairment? Maybe i’m not understanding auction rate securities completely. Aside from the above, I still agree with your assessment regarding ALSC due to it’s margin of safety and high realizability. Looks better at it’s going rate of 0.17/share.

    • ValueHuntr // March 26, 2009 at 12:37 pm | Reply

      Thanks Jason.

      The CEO resigned in December I believe because there are no more operations left to manage. The resignation was actually a good move because it will allow the company to save some cash.

      Regarding the failed auctions, you are right, there is a possibility of future impairments, and I am trying to find more information. I have been trying to contact the CFO directly, but have not been able to get through. My thesis is based on my assumption that the problem with the auctio rate securities is not one of value, but rather one of timing. Right now, the auction rate market is still frozen, so it is impossible to know when these could be monetized. I believe impairments are possible, but even if these securities are market down to 20 cents on the dollar, you will realize that this steep markdown is still greater than the current market value of the company.

  • Sivaram Velauthapillai // March 26, 2009 at 2:05 pm | Reply

    This is an interesting one. I might consider taking a position. However, the upside is far lower than it seems (although it depends on what happens to Ambac.)

    It looks like Ambac exercised its put option and swapped the ARS cash for Ambac preferred shares. It’s not clear to me how the preferred share value is calculated but if we assume the worst and pretend that the pref shares aren’t issued at depressed valuations…

    The Ambac preferred shares likely have far less value than the indicated par value. If you look at the exchange-traded bonds of Ambac (eg. AKF, AKT) it is trading at 20% of par value (around $4 for a $25 issue). The market clearly thinks there is a high probability that Ambac is insolvent. I’m a shareholder of Ambac (common shares) and have suffered massive losses so I will agree that there is a high probability of the company going under.

    The question is what the preferred shares issued to the ARS, and hence owned by ALSC now, are worth. These preferred shares are issued by the insurance subsidiary, Ambac Assurance, whereas the exchange-traded bonds I mention above are by the holding company. The insurance subsidiary has a stronger claim on the company (but these aren’t guaranteed to be paid like bonds) so these preferred shares should be worth at least 20% of par. It’s likely worth a lot more but that depends on the fate of Ambac.

    So, in a fairly conservative case, the ALSC shares are probably only worth around $0.36. I just took your cash/share and assumed it is only worth 20%. This is still around 44% upside if you buy at $0.25.

    In the most dire circumstance, it may be possible that the Ambac preferred shares are worthless! So, unlike many other liquidations, risk of total loss exists in this case.

    In a more optimistic case, the returns will obviously be far higher. You have covered this case so I’m not going to go into it.

    Finally, it should be noted that it may be difficult to liquidate the Ambac preferred shares so the time frame is uncertain. A market for these Ambac preferred shares may not exist. If one is taking a position in ALSC, they should be prepared to wait a long time. The preferred shares will pay interest, assuming Ambac is able to pay it, but I’m not sure how much that amounts to.

    Overall, I do think this is an interesting investment. It is not what it seems. It’s not a clean liquidation due to being stuck with illiquid securities. It also has a risk of 100% loss. But because of all these reasons, the upside is absolutely massive. Even if it takes 3 years and you only get half the listed value, you will make 100% per year. I’m thinking of investing in it…

    • ValueHuntr // March 26, 2009 at 2:56 pm | Reply

      Yes, you hit the nail right on the head. I am trying to get in touch with the CFO and see if he can provide some clarity on the situation with Ambac preferred and the auction market. I’ll keep you posted.

  • Nel // March 29, 2009 at 6:53 am | Reply

    Three cheers to someone who undestands what’s going on!

    ALSC is TOTALLY dependent on whether Ambac survives or not. If Ambac pulls through this mess, ABK will probably float up 5x or perhaps more. ALSC’s return is capped at 9x (at today’s price), but should rocket straight up the instant ABK gets a rating upgrade.

    Since ABK has no short term debt, should it file Chapter 11, only $1.6 billion of long term debt is lined up ahead of the preferreds shares.

    Mark to market will soon be eliminated, if it hasn’t already. (haven’t caught up to my reading yet) When Mark to Market is lifted, banks will recognized huge gains, and the pressure on ABK will be released for the short term. Capitalization ratio’s should improve dramatically.

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