Usually I don’t like to bet on the jockey, however, sometimes a good jockey can do wonders way beyond imagination. Special Diversified Opportunities (SDOI, Financial) seems to be the perfect bet. I can’t really estimate the potential upside, but the downside can be estimated pretty well. SDOI was once a biotech company that sold its operations and operates as a shell company since April 8, 2013. It has a marketcap of about $24 MM, which is slightly below net cash. The company also has $ 7.5 MM of Net Operating Losses. So I expect the company to buy some kind of health care business, because some of the directors seem to have the necessary experience in the healthcare industry. Taking over a private company in a deal employing leverage might be the best way to also take advantage of the NOLs. Nevertheless, I’ll let the board do the thinking, since their resumes seem extraordinary.
Key Players
Becker Drapkin Management, a $300 million activist hedge fund, has been engaged in SDOI for quite a while now. Steve Becker, one of the general partners, is part of the SDOI board and apparently knows what he is doing. According to Barron’s, Becker Drapkin Management have put representatives on various boards of companies 11 times. The stocks of those companies advanced about 109% on average, compared to 27.8% for the S&P. Becker Drapkin Management owns about 34% of SDOI, which seems small to the overall size of the fund, but I don’t think they will neglect such a small position, since they have put in so much work.
Philip Blazek, the President of the company, joined SDOI after the asset sale and it’s his job to find a good acquisition target. His educational background is impressive, getting his MBA in finance from Harvard in 1996. In the same year he also earned his Chartered Financial Analyst credential. After he graduated he worked in the financial industry, mainly focusing on small caps. From 2008 through 2011 he was President and CIO of an investment fund he founded.
What is taking them so long?
I hardly can believe they haven’t found any good investment opportunities since they shut down their operations, but it is likely that they want to wait for the perfect pitch. Insiders might also try to gain complete controll over the company. Another fund, called Fundamental Global Partners, bought shares of SDOI throughout 2014. The latest filing, however, shows that the fund has sold all of the shares. I can’t tell, whether Becker Drapkin Management forced them out, or they somehow were a danger to the NOLs. Of course there might have been other reasons for the sale…
Since I am invested in this company for quite a while now, I would like to finally see something happening…
Conclusion
Apparently, management is in no hurry to take over another company, which is bad for my overall annualized gains. Since stocks are at record levels in the USA, this might be a good opportunity to park some cash. The downside is very small, since the company is only loosing about a million a year which will give Mr. Blazek more than 20 years to find an acquisition target. More than enough time if you ask me. Similar investments like this one have turned out extremely well, so all we have to do is to wait. I hope we will see a good acquisition in 2015 and good returns after that.
