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Imation Corp: Following In The Path of Kodak?
Posted by: Frank Voisin (IP Logged)
Date: December 16, 2011 07:50AM
Imation Corp (NYSE: IMN) is a global developer and marketer of branded storage products such as CDs, DVDs, flash drives and magnetic tapes. It was a subsidiary of 3M Company (NYSE: MMM) until it was spun-off in the mid 1990s, and over the last decade has seen its business enter secular decline as consumers transition to the cloud. While revenues have declined since 2008, actual organic growth has been somewhat elusive as the company has made expensive acquisitions in each of the last six years.
Earnings have been negative since 2006, which has contributed to the nearly 90% decline in its share price since then. As I write this post in mid November, the company is trading at an all-time low around $6.11. A reader emailed to suggest I take a look, since the company’s free cash flows over the last five years average $85 million (versus a market capitalization of just $235 million) thanks largely to declining working capital demands as the business shrinks. Additionally, for the current market cap, someone could buy the business and receive $233 million in cash, paying just $2 million for the business itself and the remaining $161.5 million in net tangible assets.
Sounds like a pretty good deal, right? On a closer look, perhaps not.
It appears the company is committed to continuing its acquisition binge, completing two acquisitions in fiscal 2011 which contributed to the stunning $70 million decline in cash and investments (a 23% reduction in nine months). Shareholders are understandably upset. From the recent conference call (emphasis added and edited for length. Read the original document for everything):
Quote:What begins with a reasonable question on the part of Mr. Rubin (how are your acquisitions with shareholder money performing?) ends with a clear distinction between the interests of shareholders and those of insiders. Management is unable to provide any clear metrics to support its contention that these acquisitions will enhance shareholder value, and instead points to wholly irrelevant metrics (e.g. number one position, increasing revenues, strong platform) that provide no evidence of future returns.
Mr. Lucas’ final statement essentially boils down to “trust us and things will work out.” After five years of acquisitions and tangible book value declining 40% and the share price falling 86%, things have not worked out and shareholders have every reason to demand their capital back. Unfortunately there seems to be little chance of this happening, and this appears to be due to a conflict between insider and shareholder interests.
According to the last proxy statement, insiders own 6.09% of the company, reflecting an economic value of $14.34 million. One would expect this level of investment to create an alignment of interests with other shareholders, however these same insiders earned total director and executive compensation totaling more than $11 million last year alone. If it is personally so profitable to continue operating, then why would you ever move to dissolve (or shrink through a share repurchase), even if continuing to operate destroys shareholder value? It is the board’s responsibility to represent shareholder interests, yet it does not appear to be taking the necessary steps. Additionally, while management proclaims its confidence in this strategy, Mr. Rubin correctly points out that insiders are not buying shares personally.
I agree with Mr. Rubin’s assessment of the situation and based on IMN’s current valuation it appears the market also agrees. Given the conflicts of interest, I will pass even though it is trading at such a depressed price relative to its cash balance. Also, one more point on the company’s apparently high free cash flow: one must take the company’s repeated acquisitions into account and look at free cash flow after acquisitions, which paints a very different and negative picture than appears at first glance.
What do you think of IMN?
Author Disclosure: None.
Talk to Frank about Imation Corp.