Description

ASCX is an evolving liquidation story. Potential value is >$1.75/share, offering at least 100% of upside from current price.

ASCX is a provider of “evolutionary network access solutions for communications companies.” Products include access switches and multiplexers used to deploy broadband services.

ASCX held its IPO in October of 2000, raising $99mm with the help of Morgan Stanley. The stock was priced at $15 and hit an intraday high of $22. It has been all down hill since then, with the stock going as low as $0.35 in early October. Venture capital funding was provided by New Enterprise Associates and Technology Crossover Ventures.

The problem has been two-fold. First, ASCX experienced some delays in delivering a product to Qwest, its largest customer, earlier this year. Second, the entire telecom market collapsed and Qwest, along with many smaller customers, cancelled all orders. As a result, ASCX went from an annual revenue run-rate of $54mm in 1Q01 to revenues of less than $1mm in 3Q01.

Vital stats:

Price $0.73
Shares 42.4mm
Mkt cap $31.0mm

Net cash (9/30/01) $85mm

Management has come to the realization that business is not likely to recover in the near future and is taking action. The company has fired half of its 185 person work force since 6/30/01 (now 95 employees), sharply curtailed new product development, and announced the hiring of Morgan Stanley (10/25/01) to evaluate strategic alternatives. The company should exit 2001 with cash of $77-80mm ($1.81-1.89/share).

The risk is obviously that management goes out and makes a stupid acquisition and pisses the remaining cash away. More likely, I believe that the company will be 1) sold to a strategic buyer or 2) liquidated, with the technology sold to a strategic buyer. The CEO owns 10.6mm shares (25% of shares outstanding) so he is certainly incentivized to maximize shareholder value. When I spoke to the CFO, he said: “Liquidation is certainly one of the options we are looking at. The way we look at it, the liquidation option establishes a floor on the potential value that we expect to realize.”

This is a very low-risk way to make 75%+ over the next six-nine months.

Catalyst

Company has hired Morgan Stanley to review strategic alternatives. I believe that the most likely outcomes are sale or liquidation.