Last week, the shareholders of Soapstone Networks (SOAP) elected to liquidate the company. It was determined that the shareholders of record on Friday, July 31st would receive the final dividend (if any) of the liquidation proceeds, which are expected to be doled out in the first quarter of 2010. On the company’s last day of trading on the Nasdaq, SOAP traded for $7 million. Did this represent a value investment?

On its last set of financial statements, SOAP showed $82 million of cash against $3 million of liabilities. But that was before the company paid out a special dividend of $3.75/share, which comes out to about $56 million. So that leaves the company with about $23 million. The latest statements are from March 31st, however, and the company burned about $7 million in the first quarter. Since there was no mention of liquidation in the quarterly report for Q1, it’s probably safe to say the company burned some more cash in Q2. If we’re conservative and assume the company burned the same amount in Q2 as it did in Q1, that brings our running total to about $16 million.
From these numbers, it would appear as though investors could realize a 100% return in the course of a few months. However, in the interim, the company will also likely have to pay lawyers, consultants, bankers and other fees in order to complete its liquidation. It may also have to pay some amounts to settle some outstanding lawsuits. While these will likely subtract from the cash balance, the company will also have the opportunity to trade some of its property and equipment for cash. This is where someone who knows the value of the assets has an investing advantage.
Will shareholders of record on July 31st make money on their purchase? Probably. But nevertheless, there’s a risk involved. If the company’s assets fall within the circle of competence of the investor, there may be a margin of safety to be had. Otherwise, it may be more of a speculation play than a value investment.
Disclosure: None