Lights, Camera, Action
The dwindling cash was all that stood between the company and death. He thought the venture would not survive the winter… It made no money and spent what it did have poorly. He dreamed of walking out of the bank with the stash and going to other sorry companies where he could run the same hustle and all the doors would open up but he was learning how to wake himself from such siren worlds.
That… is a very rough shot at how Cormac McCarthy, or a first-year English major channeling McCarthy, might set the tension in our story.
"Show, don't tell" works wonders in storytelling. Does it also work in investing?
Wishing Well
The traditional version of shareholder activism is to buy a small stake in a company and then make a lot of noise about what you think management should do. Usually that means the company selling something or selling everything.
In this scene, Cannell Capital purchased a 3% stake in a digital commerce app, Wish, run by ContextLogic. Cannell laid out its case simply: the company has a lot more cash in the bank than its shares are worth in the market. It could shutter operations, see if anyone would buy any of the company's software, take the cash out of the bank, and pay shareholders a dividend worth more than their shares. From a shareholder perspective this is appealing.
From a management perspective, this is a bummer. You've done such a bad job that the market values your business less than the cash in the bank. And Wish has done a pretty bad job. It went public in December 2020 at a $1 billion value. Today, it’s lost about 90% of that. It's burning through cash to try and save the business. And now, Cannell wants your job to be to run it down to zero.
If you're management, or the Board, you get paid more if you keep running the thing into the ground and just take your salary. Cannell can scold, admonish and pester the company to do something all it wants. Management's incentive is just to avoid the issue and keep cashing paychecks.
Making it Rain
Another version of shareholder activism is to create the action yourself.
In this scene, Tang Capital bought a 15% stake in a clinical stage biotech company, Rain Oncology. Rain isn't doing anything right now. They axed their clinical program after poor results along with most of their employees earlier this year. They, like WISH, have more cash in the bank than their shares are worth in the market.
Along with its 15% stake in the company, Tang offered to buy the whole company at a 25% premium to the company's share price and give shareholders 80% of any upside it achieves from shutting the thing down. Rain has about $1.80 per share in cash in the bank.
Management and the Board still have the incentive to keep their paychecks coming, but it’s much harder for them to drain the cash when there's an actual offer on the table. It helps too that Tang owns a significant stake.
Tang has had some success campaigning for some of the many biotech companies trading for less than their cash value to do something. It has also had some failures.
Whether Tang's Rain campaign succeeds is an open story. That story, though, is a far more compelling one than Wish. Tang already controls a significant portion of the company. Other large shareholders likely sympathize with Tang's position. Rather than just badgering the company to wind down, the activist offered to put up the money for the rest of the company itself. Activism with real action sets the stage for a real resolution to the story — one that reduces risk and improves the odds for investors.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.