Rats. It happened again. A corporation agreed with me. A company with great potential and an undervalued stock can be a great investment. In the case of Asterias, that meant BioTime is buying the entire company. Yet again, one of my tiny stocks gets absorbed before it succeeds. At least it means I had a good idea, but I’m not as likely to benefit from it. So goes one of the risks of owning stock in small companies. This time, however, I may yet benefit.
I’d like to take credit for discovering Asterias (AST), but it was delivered to me as a spin-off from another small company with great potential, Geron. I can’t even claim credit for my GERN holdings because it is one of the few times I followed a tip from a friend. And yet, I’ve held GERN shares for almost twenty years, was glad to buy more shares of AST recently, and was looking forward to buying more. Geron’s technologies, whether within Geron or those sold off to other companies, were the attraction. Geron has been developing treatments specifically targeting the extension of life. All curative medicine could be said to target the extension of life, but most do so implicitly by treating illness. Geron does so, too; but Geron also has technologies with the potential to regrow damaged organs. Their stem cell treatments were spun off to Asterias, which has successfully helped accident victims regain muscle control after nerves were damaged in accidents. That’s not just life extension. That’s life enhancing.
Asterias is only in Phase Two of their clinical trials. Unless there’s a compassionate acceptance by the FDA, there’s a typical progression to expect of Phase Three and the conventional approval process. Asterias could be years from approval in such a case, which can also be years of opportunity for speculative investing. The potential is great considering the large population of accident victims as well as the possibility of improving nerves damaged by disease. That potential is probably why BioTime bought back the part of Asterias they didn’t already own.
While the buyout is a good sign for the technology, it can be limiting for investors. As I replied on InvestorVillage.com;
“At a very cursory level, it means a $60M company is being absorbed into a $260M company, so the net impact of a positive event is roughly proportionally reduced.
Imagine a $60M company announcing $60M in profits.
Imagine a $320M company ($60M+$260M) announcing $60M in profits.
This is why I usually sell small companies when they are bought by larger ones. In this case, however, the ‘large’ company is relatively small and the potential profits could be larger than the $60M (based on opinion and historical biotech trends, not an analysis of Asterias).”
At least with Asterias, I’ll receive 0.71 shares of BioTime for every share of AST I own. The tidy part of me will probably respond by buying enough shares to even out that remaining 0.29 shares. It’s silly, but I like tidy portfolios.
This isn’t the first time such a buyout changed my portfolio. The hardware store, Eagle, was absorbed just as housing renovation boomed into the behemoths of Lowe’s and Home Depot. Something similar happened with the grocery store chain, QFC. Lands End was bought by Sears. More famously, Pixar was bought by Disney. More recently, GigOptix/GigPeak was bought by Integrated Device Technology just as Gig turned a profit. (Gig Goes Buy Buy) In each of those cases, I would’ve preferred to retain stock in a small company that would grow a lot, rather than watching a small company with great potential be absorbed into something so large that their contribution will barely be noticed. Starbucks, Microsoft, and f5 Networks are great examples of small companies disrupting their industries without losing their sovereignty. My classic case was buying America Online, holding it through great turmoil, and selling when it collided with Time Warner. (Want more details? Check out, read, and maybe even buy my book that inspired this blog – Dream. Invest. Live.)
Wealth concentration isn’t just a trend within the uber-rich. It’s also a trend within the corporate world. Companies buy companies to better invest their funds, but they also do it to buy out competition or acquire technologies or employees rather than developing them internally. If you’re about to lose your business to an upstart that’s a hundred times smaller than you, then it can be trivial to buy them now instead of investing the money in research that won’t be harvestable for years.
And it isn’t really companies buying companies. Companies are made of people (though there’s now a legal avenue that may allow an Artificial Intelligence to take over.) (Legal AI Personhood) People who represent a majority of shares in one company negotiate with people who represent a majority of shares in another company. It isn’t the majority of shareholders, just the majority of shares. When Disney absorbed Pixar, they only had to convince a few people. Steve Jobs owned almost half. Add in a few other key people and 51% is easy to reach. Rather than bid of the price of the stock as much as I thought it was worth, Disney offered shares of Disney plus great job titles to those few people. The great successes of subsequent Pixar movies just became part of the Disney empires revenues. Enjoyable, but not nearly as profitable to the shareholders.
It is important to evaluate a company and a stock based on the goods and services they provide. That helps in estimating the company’s potential. It is also important to evaluate the management team and their compensation packages. How likely are they to act selfishly? In America, all they have to do is represent the majority of the shares instead of the majority of shareholders. Are they building a company or a buyout package?
Buyouts are a caution I have about any small company. AMSC benefited from one, until they didn’t. Now, AMSC’s disruptive technology doesn’t seem to be disrupting anything. Maybe they won’t be bought out. Asterias just took the plunge. Geron has been a seller, not a buyer; and their most recent news hasn’t lived up to expectations. MicroVision’s potential continues about as high as ever, though dilution has diminished MVIS’ potential. MicroVision’s management, however, hasn’t instilled confidence that they have a long term strategy for the company. For the technology, yes. For the stock, no – at least from my perspective. Even the shareholders regularly discuss buyout prices, proving that everything has its price. In MVIS’s case, that price may be below my break-even price. NeoPhotonics is what I bought after Gig was bought out. I bought. It dropped. Now, it’s raising again. Maybe it will sustain and attain positively.
Not everything gets bought out. Look around at recent successes like Facebook, Amazon, Tesla. Charismatic leaders can sustain visions and attain great successes for themselves and their shareholders. Maybe BioTime’s leadership will lead on. If they do, I’ll be glad for the patients and myself; but I know my portfolio will reflect a much smaller portion of that success than it would have otherwise.