Value Find: Alliance Semiconductor Corp.
The volatile market may have presented an opportunity in shares of Alliance Semiconductor (OTC:ALSC), a microcap semiconductor turned investment holding company.
In early 2006, as the result of a proxy contest, large Alliance shareholder Riley Investment Management effectively took control of the then money-losing and mismanaged company and installed Melvin Keating as CEO. Under Keating, Santa Clara, Calif.-based Alliance has spent the past few years divesting assets and reducing expenses. Most notably, in January 2007, Alliance closed on the sale of its stake in the Alliance Ventures investment partnerships for over $123 million in cash. In February of this year, Alliance concluded a settlement with the IRS. Pursuant to this agreement, Alliance will receive a federal income tax refund of $6.6 million plus interest that it estimates “should be approximately $2 million.” Alliance also expects to receive an income tax refund of “approximately $1.6 million” from the state of California.
After accumulating a sizeable cash hoard through a series of asset sales, Alliance has returned value to shareholders over the past year through a series of special cash dividends. Most recently, Alliance announced a special dividend of $0.10 a share, which is payable May 20 to shareholders of record as of May 12. After paying this latest special dividend, Alliance will have returned a total of $4.10 a share in cash dividends to shareholders since July 2007. According to a business update that Alliance provided on April 28, it has continued to liquidate its stock position in Tower Semiconductor Ltd. (Nasdaq:TSEM). Alliance says that it sold $2.3 million worth of Tower stock during the fiscal fourth quarter ended March 31. Since then, Alliance has sold another $1.5 million worth of Tower stock. This latest selling leaves Alliance with just 112,000 Tower shares left to liquidate before having fully realized this investment.
Alliance hasn’t yet filed its annual report for the year ended March 31. As of Dec. 31, Alliance held $9.5 million in cash, nearly $65 million in short-term investments and a $6.6 million federal tax receivable. Of these short-term investments, $59.4 million was held in asset-backed securities with the remainder in Tower stock. These asset-backed securities are at the root of why Alliance shares have declined in recent months. Shares of Alliance closed at $1 on Monday, down from January’s $1.50 level and near a 52-week low of $0.85 a share, set on April 28. The turmoil in recent months in the credit markets has turned the asset-backed securities market on its head. What should have been a relatively safe investment for Alliance has become a giant headache. It remains unclear when liquidity in the monthly auctions of asset-backed securities will be restored. Until then, Alliance has lost access to most of the cash on its balance sheet.
In addition to returning value to Alliance shareholders through special dividends, Alliance had also hoped to potentially use its cash position, tax credits and public stock listing to acquire a profitable, privately held company. With the recent asset-backed securities brouhaha, an acquisition likely won’t be happening anytime soon. This has also contributed to taking the air out of the stock. While we normally shy away from even speculating in “shell companies,” the sell-off in Alliance appears overly excessive. Interestingly, the microcap’s two largest shareholders, Bryant Riley of Riley Investment Management and Lloyd Miller, III, have been buying the stock in size in recent months. Just in the first two weeks of May, Riley has bought over $550,000 worth of Alliance stock in a range of $0.90 to $1.07 a share. All told, Riley and Miller have bought $2 million worth of Alliance stock over the past year, much of it occurring since January. This is big insider buying for just a $33 million market capitalization name.
While the value of Alliance’s asset-backed securities will undoubtedly be marked down in its forthcoming annual report, the recent pessimism in the stock may prove excessive. Riley, whom also serves as Alliance’s chairman, and Miller could be proven dead wrong, but they aren’t behaving like they think value in this stock will be impaired for good. Even with significant discounting to Alliance’s net asset value, a stock price of $1.30 or more within a year looks possible. Of course on the downside, this stock is relatively illiquid and could also be dead money for several quarters. This is not a play for medium- or lower-risk investors. But for the speculator, Alliance looks tempting around the $0.85 a share level. Make sure to use limit orders.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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