Thursday, December 31, 2009

Error In Yesterdays Subscriber Feed

If you received the post yesterday titled "Earnings Update" from two years ago, it was sent by mistake. Sorry for the inconvenience.

Happy new year to subscribers and readers of Alex Bossert's Thoughts on Value Investing.

Saturday, December 5, 2009

Convera Corp.

Convera is a liquidation play. Convera is trading for $.22 and the company estimates investors will receive $.26 per share in cash in the next 12 months and an additional $.11- $.19 after intellectual property is sold. The trading volume on Convera shares is small with around 150,000 shares traded a day.

According to Yahoo Finance, Convera’s business consists of “vertical search services to trade publishers in the United States and the United Kingdom. The company provides hosted white-label search technology and services, which enable publishers to generate Web traffic and online revenues by creating customized search applications. Its search platform helps publishers to combine site search, their proprietary content and an editorially vetted best of the Web into a vertical search application that provides an authoritative and comprehensive search experience for specialist audiences. Convera Corporation’s vertical search service comprises a suite of various components, including Web Search Platform that incorporates multimedia search of Adobe Systems Portable Document Format, image files, and other data formats; Convera Ad Service that allows publishers to manage and pursue search-based advertising revenues for their vertical search Web sites; and Publisher Control Panel, a self-service application that provides the publisher with the ability to control and tailor the Convera Web Search Platform and the Convera Ad Service for each vertical search site from a single interface. It also offers Converanet, an online search directory portal that contains various search engines in a single Web site. In addition, the company provides various professional services consisting of Web site customization; search engine optimization, marketing services, and training; and advertising sales kit development and training.”

Liquidation Time table:

Majority shareholders have already approved the liquidation:

According to the proxy statement: “Holders of our Class A Common Stock which represented a majority of the voting power of our outstanding capital stock as of the Record Date, have executed a written consent in favor of the actions described above and have delivered it to us on September 22, 2009, the Consent Date. Therefore, no other consents will be solicited in connection with this Information Statement.”

The Certificate of Dissolution hasn’t yet been filled:

“We anticipate that we will first take corporate action with respect to the Plan of Dissolution in accordance with our stockholder approval by filing the Certificate of Dissolution with the Secretary of State of the State of Delaware not less than twenty (20) days after the mailing of this Information Statement to our stockholders.”

The first cash distribution will take place shortly after the certificate of dissolution is filled with the state of Delaware.

Distributions:

The liquidating distributions consist of two parts. First, Convera will distribute a cash component worth $.26 per share. Second, after the certificate of dissolution is filled, Convera will merge its remaining intellectual property with VSW recieving a 33% ownership stake in VSW. Convera will sell its 33% interest in VSW or distribute it to shareholders. The company says the value of its ownership interest in VSW will be $.11 - $.19 per share.

Cash Component:

According to the proxy statement:

“In connection with the Merger, our stockholders will receive cash, plus a pro-rata share of an aggregate of one-third of the common stock of VSW. Our management estimates that our residual cash, after transfer of all of the operating assets and $3,000,000 in cash at closing of the Merger, drawn-down portion of the $1,000,000 line of credit, and various wind-down activities, will be approximately $14,000,000. We plan to distribute $10,000,000 shortly after the closing of the Merger, with the remaining $4,000,000 to be distributed in $2,000,000 increments at six months and 12 months after the closing of the Merger, subject to possible holdbacks for potential liabilities and on-going expenses deemed necessary by our board of directors in its sole discretion.”

The present value of this cash distribution, assuming a discount rate of 10%, is estimated at $0.26 per share. The calculation was performed as follows:





Value of intellectual property:

“Following the filing of our Certificate of Dissolution, we expect to consummate the merger of B2BNetSearch, Inc. and Convera Technologies, LLC, each a wholly-owned Delaware subsidiary of Convera, with VSW 2, Inc., the Delaware parent company of Firstlight Online Limited, a company in the business of online advertising sales and marketing incorporated as a company limited by shares in the United Kingdom (“Firstlight”), pursuant to, and subject to the terms and conditions of, an Agreement and Plan of Merger dated May 29, 2009, as amended and restated on September 22, 2009 (the “Merger Agreement”). As a result of the Merger, Convera will own 33.3% of the total outstanding capital stock of Vertical Search Works, Inc., a Delaware corporation and the indirect parent company of VSW 2 (“VSW”)."

“Both our CEO, Patrick Condo, and CFO, Matthew Jones, will join VSW after the effectiveness of the Merger. Mr. Condo has entered into a transition agreement with us and we intend to enter into a transition agreement with Mr. Jones. Additionally, it is the intention of the parties that Messrs. Condo and Jones enter into employment agreements with VSW.”

“In accordance with such agreement, we will pay Mr. Condo, among other benefits, an aggregate amount of $480,000 in cash in a lump sum on the 30th day after the closing of the Merger, provided that Mr. Condo has signed and delivered a general release in favor of us and the release has become effective.”


“Hempstead assessed the value indication associated with a one-third equity interest in VSW based upon the discounted cash flows methodology. Specifically, under a discounted cash flows methodology, the value of a company’s stock is determined by discounting to present value the expected returns that accrue to holders of such equity. Projected cash flows for VSW were based upon projected financial data prepared by our management. Estimated cash flows to equity holders were discounted to present value based upon a range of discount rates, from 25% to 35%. This range of discount rates is reflective of the required rates of return on later-stage venture capital investments."

The resultant value indications for the VSW component of the transaction, on a per-Convera share basis, are as follows:





The valuation placed on the 33% interest in VSW is $.11 - $.19 per share. Convera’s estimate of the value for the cash and valuation of VSW stock to be received in liquidation are within a range of $0.37 to $0.45 per share.

Herb Allen:

Herbert A. Allen has been a director of the Company since the effective date of the Combination on December 21, 2000 and was a director of Excalibur since June 2000. He has been President, Chief Executive Officer, Managing Director and a director of Allen & Company Incorporated, a privately-held investment firm, for more than the past five years. He is a member of the Board of Directors of The Coca-Cola Company. He is the father of Herbert A. Allen III.

The Allen family and Allen and Co. control over 61% of the company. Since Herb Allen is friends with Warren Buffett, I’d assume he is honest and trustworthy. He is also a very well connected person, knows a lot of power players, and with his own money on the line its good that the person in control has an interest in making sure the liquidation is completed quickly and efficiently. Both Herb Allen and his son are on the board of directors of Convera.


Conclusion:

Convera shareholders will receive the following as part of the liquidation:

1) $10m or $.187 per share upon closing of the merger
2) $2m or $.037 per share 6 months after the closing
3) another $2m 12 months after the closing plus 33% of VSW, estimated to be worth $.11- .19 per share.


At a purchase price of $.22, I’m being paid an 18% return to hold a free option on the value of VSW. The value of VSW is unknown but all the upside is free. One of the major risks in a liquidation play is executives have an incentive to delay the liquidation process and continue collecting their salaries. In this case, the executives are being hired by VSW so they don’t have to worry about losing their jobs. In addition the CEO, Patrick Condo will receive $480,000 30 days after the closing of the merger. Executives, especially the CEO have an incentive to move the liquidation process along quickly. Also, Herb Allen controls over 61% of Convera and he and his son are on the board. I like the fact that he’s friends with Warren Buffett and he will insure that the liquidation process moves along quickly because $8 million of his money is on the line.

The author owns shares in Convera.