Tip of the Week: Shells With Cash
By David Feldman at 25 September, 2009, 6:08 am
Lately I have been asked increasingly about shells with cash. Especially now with the capital markets still challenging, especially for financings of going public transactions, it seems logical to try to find a shell company that can also provide a built-in ability to raise capital. No worries about whether the investment bank you hire can raise the money they promise to, no commissions to them, etc. Seems like everyone would want to do this.
How do shells get cash? In most cases the cash is left over from a corporate transaction by the former operating company in the now shell. If a company is sold for $20 million, why not leave $2 million in the till and use it to buy another company, possibly giving the shareholders a “double hit”? Sometimes those funds were left outside the transaction temporarily as a hedge against misrepresentations, and upon release the company decides simply to leave it there. In some cases a shell actually raises money, but that is, frankly difficult to do in a situation without all the protections afforded by vehicles such as SPACs (special purpose acquisition companies), where the money is in escrow and investors have the right to get their money back if they don’t like the proposed deal. Last are situations where a windfall comes after the shell jettisons its operating business, such as a resolution of a litigation or major royalty payment on a license arrangement left behind. These are also rare.
In a market where shells are currently plentiful at surprisingly affordable prices, almost, as one commentator has noted, commoditized at this point, shells with cash are actually pretty rare at the moment. They are out there for sure. But some of the oeprators of these shells are willing to wait for the perfect deal, or the right market conditions. Shells without cash must continually replenish their coffers to pay for operating expenses. If a shell has $2 million in cash, and it costs $25,000 a year to keep it going, they can do that for quite awhile indeed without feeling it. Thus, some are very picky about what deal to do, in what conditions, and on what terms. Some even value the cash at a value that is, well, in excess of the value of the cash. This is arguably not unreasonable, since there is a real value to knowing the cash is there.
So what to do? My friends who have shells with cash, both of them (j/k), obviously want to see deals. So I will and do show some to them. But a company considering talking to a shell with cash should understand that they tend to view the market economics differently than those holding cashless shells, and the cost of doing the deal likely will be higher all told. However, if you are willing to do that deal, you do indeed get the certainty of knowing what financing you will be able to achieve. That is a real benefit indeed.
My RM learning curve is steep but I’m compelled to consider one seriously for my company. My fear is the short sellers — what do they look for and how powerful might they be to our stock price? thanks
Teri – it is a real concern, to some extent. The reality is that any company going public on the OTC Bulletin Board or Pink Sheets faces a challenge developing market support. My mantra always has been that this support develops over time for companies that earn and deserve the support – by achieving what they promise and sticking to their business plan. But in the end even well-traded stocks over the counter retain those challenges. The goal is course is to “uplist” by developing a market value and shareholder base that qualifies you to move to Nasdaq or NYSE Amex, or, if you’re really lucky, the NYSE Euronext. Here it is much more difficult for short sellers and others to illegally manipulate the stock. The WRASP method of taking a company public through a reverse merger directly to one of those major exchanges offers a way to avoid the over the counter step. Hope that helps!