2.0 Net Perceptions (re-published from June 1 Monthly Report)

Giving Back:  What to do with a public company which trades below its cash value?  And what does it mean? 

My first experience as an investor looking at companies trading below cash value was to buy the stock.  How could I lose?  One could liquidate the company and make money at the very least.  What would lead the investment community to sell – and buy – below the cash value? 

I have since come to the conclusion that stock trading below its cash value is an indication that investors are discounting management’s ability to turn the company around.  In this case, a monkey could liquidate the company and increase the value of the stock.  However, management is never convinced that it can’t rescue a company and increase its value beyond the cash value.

This leads me to Net Perceptions (NASD:NETP), a local software company which originated from technology at the University of Minnesota, was funded by both Hummer Winblad Venture Partners and St. Paul Venture Capital and rode the Internet wave to a very high valuation.  Then the hinges came off the door.  The company has never recovered.  Some new management was brought in.  There is no question that the management and employees at Net Perceptions are trying hard.  But somewhere in business theory 101 is the idea that management and the Board of a company has a duty to the stockholders to maximize shareholder value.   

Net Perceptions had a very successful initial public offering.  It also had a tremendously successful secondary offering while its stock was still trading at a high but declining value.  Any company deserves a second chance but it is time for Net Perceptions to seriously look at its prospects for success.  Would it make sense to dissolve the company and return the proceeds to the shareholders at a premium over the current stock value?  It does if the company has no viable plans for increasing sales, making a profit and growing.   

The company’s products are related to the field of personalization; sometimes known as collaborative filtering.  The software is ostensibly sold to help e-tailers increase sales based on knowing more about the customer; the customer who shops on the Internet.  The market for such software has weakened considerably in the last 2 years.  Personalization is a very cool technology and it is worth something to retailers.  The question seems to have been answered for now – not enough.  Other local companies with “Internet software” such as Digital River and Stellent have fared much better because their products are fulfilling basic needs and they are leaders in their respective markets.   

It would seem Net Perceptions' hope would be to use some of the cash on hand to selectively buy undervalued but promising software companies with growth potential.  Another option would be to sell the company for a premium over its cash value.  Another option is to use its personalization algorithms for national defense (profiling suspected terrorists!).  But it is time to do something.  It’s been approximately eighteen months since the stock traded above cash value. 

I pick on Net Perceptions in this article because it was held out as a darling of the Internet age in Minnesota.  No local company had more hype at that time.  It was exciting and more than one Minnesotan bought the stock.  A local angel investor recently told me – without any suggestion from me – that he thinks liquidation is long overdue.  He rode the stock from IPO to 60 and down to its current value. 

Shareholders, especially those who bought at the secondary offering, made an investment based on the company using the money to grow and become profitable.  It is very doubtful they will ever realize any return based on their purchase price.  It would be responsible for the company to try to mitigate their loss.  Without a plan to increase shareholder value soon, it would seem the best option now is to liquidate. 

6/11   NetSuds Entrepreneurs Breakfast - Marriott SW Minnetonka
          http://www.netsuds.com/eb/2002/june/