Three months ago, I highlighted four stocks trading below net cash.  Since that time, two of those companies have been subject to buyout offers, the second coming today as the British company, CSR, offered to buy SiRF Technologies.  Let us see how each has performed since, starting with SiRF.

SiRF Technologies (ticker SIRF)

Price on date of mention: $1.25
Closing price: $1.68
Return: 34.4%

SIRF was perhaps the most problematic of the four examples, given that the company had lost several court rulings regarding their GPS navigation patents.  Despite their problems, CSR offered to swap 0.741 shares for each share of SiRF.  It is not hard to see why.

Currently, SIRF has $98 million in cash net of debt on its balance sheet, 62 million shares, $163 million of shareholders equity, and $137 million of tangible equity.  At the close yesterday, SIRF stock was quoted at $1.08. 

CSR trades on the London Stock Exchange and closed today at 198p.  With the pound trading at $1.45, the value of the offer for SIRF closed at $2.13, valuing the equity at $136 million, a 27% premium, reflecting the lack of financing for risk arbitrage.  With $98 million in cash, CSR is effectively paying $38 million for SiRF, the book value of all tangible assets excluding cash.  Thus, disregarding any asset writedowns, CSR is getting SIRF's technology for free.

With the stock closing at $1.68 today, shareholders who bought at $1.25 when SIRF was highlighted in my post have earned 34%.  If the arb spread closed tomorrow, the return would be 70%.

I do not know much about CSR.  However, the financial metrics look very appealing.  After the merger, the company will have net cash of $361 million, or $2.01 per share.  With the stock trading at 198p, or $2.88 after currency conversion, net cash represents 70% of total market capitalization.  The combined company would have been free cash flow positive over the past 12 months.

The stock is dirt cheap on other metrics.  The new company trades at 0.56x sales and 0.61x book value.

Semiconductor companies are highly cyclical.  At the prior peak in 2006, CSR traded at 7.43x book value.  With a book value of the new company at $4.70, at the prior peak multiple of book, the stock would trade at $34.89, a 1,112% return from today's levels.  Owning SIRF would yield a return of 1,977%.

I do not know if CSR will reach that peak again.  However, I have no doubt that the semiconductor cycle is alive and well, and one day, chip stocks will be markedly higher.  Even if CSR retraces a quarter of its prior peak, owning SIRF now will be incredibly profitable some time in the future.

Avanex (AVNX)

Price on date of mention: $1.61
Closing price: $1.68
Return: 4.3%

Two weeks ago, Avanex was subject to a bid by Bookham.  Avanex shareholders will receive 5.426 shares of Bookham for each share of Avanex.  Bookham trades at $0.32 per share.

Shares outstanding for Bookham are currently 101 million and 16 million for Avanex.  Post-deal, the new company will have 186 million shares outstanding for a market capitalization of $73 million.  The combined company will have $73 million in net cash.  Thus, Bookham/Avanex is currently trading at the cash value of the new entity.  The combined company would have been slightly free cash flow negative over the past 12 months.

Bookham printed $128 million in shareholders' equity in their last filing while Avanex had shareholders' equity of $63 million, giving the combined company a total book value of $190 million.  The company currently trades at 0.3x book value.

At the previous peak in 2006, Bookham traded at 3.85x book value.  If the stock hits the same peak at the height of the next cycle, the share price will be $3.94, giving equity holders a return of 1,130%.

O2Microdevices (OIIM)

Price on date of mention: $2.18

Closing price: $2.77

Return: 27.1%

Tundra Semiconductor (TUN.TO)

Price on date of mention: C$3.29

Closing price: C$3.15

Return: 4.4%

A basket of the four stocks equally weighted would have returned 17.6% since November 12.  On that day, the S&P 500 closed at 852.30.  With the index finishing at 827.16 today, the market has fallen 2.9% since then.

I am long all four stocks.  With potential returns of 500%-1,000% over the next several years, and the stocks all trading near or below cash value, I could not care less about the technical action, nor do I care about market levels.  I sit and wait.