ARC Wireless Solutions (ARCW, Financial) is a provider of wireless network components. The company has a history of losses, with an accumulated deficit now in excess of $8.5m vs total market cap of just $8.9m, but I noticed it because it trades at a 25% discount to its NCAV value (which is predominantly made up of cash and equivalents). In this situation, I investigate to see whether the poor earnings situation is enough to outweigh buying the assets at a discount.
There are several reasons why I am staying away from ARCW, but none more important than the fact that I do not believe there is a sufficient margin of safety. The company has never really made any money and it shows no interest in liquidating, so the company is lacking a clear catalyst. Instead, this could very well turn out to be a muddle-along investment that will persist in trading at a discount to NCAV. In some situations, I can look beyond this if the discount to NCAV is great enough, but 25% doesn’t justify it for me.
Beyond the margin of safety, the company has also entered into some strange contracts with related companies. The CEO of the company is also a managing director of Quadrant Management Inc, which is a subsidiary of Brean Murray Carret Group (“Brean”). Brean owns 21% of ARCW. With ownership and control of the firm’s CEO, there is little doubt as to the interests best being represented inside ARCW. Quadrant Management, as an activist investor, entered into a “Financial Advisory” contract with ARCW which granted Quadrant a $250k signing fee, covers all of Quadrant’s out-of-pocket expenses, and then results in Quadrant being paid the greater of $250k per year or 20% of the marginal improvement in EBITDA. The sticker shock of this contract is slightly offset by the fact that the current CEO earns a nominal salary from ARCW (~$25k last year) so the fees to Quadrant are acting as the CEO’s compensation. The problem I have is that I have never seen a CEO of a company earn a bonus of 20% of marginal EBITDA, and the actual CEO’s compensation from Quadrant almost surely does not have the same clause (I would be happy to hear otherwise), which means that Quadrant, as the subsidiary of Brean, is earning an outsized fee for Brean’s 21% ownership at the expense of the other 79% of shareholders. For me, this is a dealbreaker, as it shows the governance issues that ARCW faces and the relatively poor position of unrelated shareholders.
One other point to note is that the company has also outsourced its product sourcing and manufacturing to another related entity, Rainbow Industrial Limited (though, in this case, the company says RIL does not earn a profit from ARCW).
Frank Voisin
http://www.frankvoisin.com
There are several reasons why I am staying away from ARCW, but none more important than the fact that I do not believe there is a sufficient margin of safety. The company has never really made any money and it shows no interest in liquidating, so the company is lacking a clear catalyst. Instead, this could very well turn out to be a muddle-along investment that will persist in trading at a discount to NCAV. In some situations, I can look beyond this if the discount to NCAV is great enough, but 25% doesn’t justify it for me.
Beyond the margin of safety, the company has also entered into some strange contracts with related companies. The CEO of the company is also a managing director of Quadrant Management Inc, which is a subsidiary of Brean Murray Carret Group (“Brean”). Brean owns 21% of ARCW. With ownership and control of the firm’s CEO, there is little doubt as to the interests best being represented inside ARCW. Quadrant Management, as an activist investor, entered into a “Financial Advisory” contract with ARCW which granted Quadrant a $250k signing fee, covers all of Quadrant’s out-of-pocket expenses, and then results in Quadrant being paid the greater of $250k per year or 20% of the marginal improvement in EBITDA. The sticker shock of this contract is slightly offset by the fact that the current CEO earns a nominal salary from ARCW (~$25k last year) so the fees to Quadrant are acting as the CEO’s compensation. The problem I have is that I have never seen a CEO of a company earn a bonus of 20% of marginal EBITDA, and the actual CEO’s compensation from Quadrant almost surely does not have the same clause (I would be happy to hear otherwise), which means that Quadrant, as the subsidiary of Brean, is earning an outsized fee for Brean’s 21% ownership at the expense of the other 79% of shareholders. For me, this is a dealbreaker, as it shows the governance issues that ARCW faces and the relatively poor position of unrelated shareholders.
One other point to note is that the company has also outsourced its product sourcing and manufacturing to another related entity, Rainbow Industrial Limited (though, in this case, the company says RIL does not earn a profit from ARCW).
Frank Voisin
http://www.frankvoisin.com
