On October 10th, InsWeb (INSW), an Internet-based lead generation provider for insurance agents, closed down 5 cents, at $6.20. Just 300 shares traded in the small-cap stock, which at day's end had a market capitalization of $41 million.
But, after the market closed, InsWeb management made a startling announcement: the company was selling its lead generation business to Bankrate (RATE) for $65 million in cash, and the assumption of certain liabilities (possibly including two non-cancellable leases currently held by InsWeb). The stock jumped nearly 42% in the next day's trading, before drifting downward over the next two months, only to regain some lost ground over the last two weeks.
InsWeb's decision to sell essentially all of its operating assets -- a transaction which closed on Wednesday -- has created an interesting case for investors. At Friday's close of $8.02, the company still had a market capitalization of just $51.2 million (please note that figure is calculated using diluted share count from INSW's third quarter earnings report and may differ from other publicly available data sources.) And yet the company has a fresh $65 million in the bank, in addition to an existing $6 million on hand, plus potential working capital adjustments from the deal that could reach as high as $5.9 million (INSW's total liability balance as of September 30).
To summarize, a company that has at least $70 million in cash on hand, and little or no liabilities, has a market capitalization of just $51 million. Furthermore, InsWeb management -- to its credit -- has made clear it intends to return much of that cash to shareholders. From the company's press release regarding the acquisition (emphasis mine):
The Company, and not its stockholders, will receive all of the net proceeds from the asset sale transaction. Following the transaction, the net proceeds from the transaction, combined with approximately $6 million in cash from current operations that will remain with the Company, are expected to provide ample capital for future operations. The Company anticipates using a portion of the net proceeds for general working capital purposes in connection with the development and operation of the patent licensing business. In addition, the Company expects to use a substantial portion of the net proceeds from the asset sale transaction to make a special cash distribution to its stockholders in the first quarter of 2012. The Company expects that to the extent the sale of assets results in the recognition of a net gain for tax purposes, the Company's available net operating loss carryforwards will offset a substantial part of such gain.
InsWeb held a special meeting on Wednesday morning, where shareholders ostensibly approved the deal, given Bankrate's announcement of the deal's completion later that day. (InsWeb has not released any information regarding the meeting's results; the agenda also included a name change to Internet Patents Corporation and agreement on compensation for InsWeb executives' role in the transaction.)
With the sale completed, the key questions now for investors are: how much cash will INSW have? And how much does the company plan to return?
Going forward, INSW expects to remain publicly traded, and focus on its portfolio of 5 e-commerce patents. Bankrate received a royalty-free, non-exclusive license as part of its asset purchase, and INSW management appears ready to pursue additional licensing deals. Unfortunately for the company, they have never completed a licensing deal -- at least not one that created any revenue. The assets sold to Bankrate created all of InsWeb's revenue over the past three years (per the most recent 10-Q). InsWeb expects no revenue for the remainder of 2011 and "at least a portion of 2012" (again, per the 10-Q). In its filing, the company did mention the possibility of selling the patent portfolio, which would likely require the liquidation or outright sale of the entire company.
In addition, there are tax issues -- both for the company itself and for shareholders. The company expects tax loss carryforwards to "offset a substantial part " of the tax liability from the gain -- but has not, as yet, said it expects to pay no tax at all. In addition, INSW shareholders will pay tax on the projected special dividend; new investors would need to hold the stock until at least late February to receive a qualified rate of 15%.
Finally, the payout to executives and the unnamed "adjustments" mentioned in the Bankrate announcement of the acquisition's closing may use up more cash.
Still, the company would appear to have roughly $20 million in cash -- over $3 per share -- free and clear above its market capitalization. How much of that is eaten away by Uncle Sam, InsWeb executives, and the working capital needed to restructure the INSW business model remains to be seen. But the stock seems worth keeping an eye on, should it dip back toward the $7 level or should the company maintain what appears to be a shareholder-friendly treatment of its newfound wealth. In particular, investors with low taxable income for either 2011 or 2012 (below $34,800 for 2011), would qualify for a 0% tax rate on an INSW dividend, and thus might have a tax advantage relative to other potential investors ahead of the special payout. (As always, please consult a qualified professional before making any tax-related investment decisions.)
How exactly INSW's cash balance will shake out remains to be seen; but it appears likely from its public statements that the company, currently trading at $8/share, will pay a special dividend of $4-6 per share in the first quarter of 2012, leaving a company that has no revenue, a few valuable assets, and, most likely, a cash balance greater than its remaining market capitalization.
Credit should be given to InsWeb management; value investors, time and time again, have looked at balance sheets and argued: if only the company would monetize its assets and return the capital to shareholders, the stock would skyrocket. INSW management has done so in this case, creating a nearly 30% gain for its investors. And as the final details about their move emerge, more value may be yet to come.