Liquid Audio: Better off dead?

mgeneral writes "It seems so for the shareholders. Liquid Audio, had only $150,000 in revenue but managed to lose $5.6 million last quarter. Its main asset: A pile of cash. In fact, so much cash, that if they close the doors, they could pay back the shareholders more per share than the current stockprice...and thats exactly what some investors want them to do." We've run stories on Liquid Audio before...

Comments

Liquid Audio should die

[locarecords.com]

Seems to me time for Liquid Audio to die. There is no point throwing good money after bad and the shareholders can then invest in something new (if they aren't too scared off the Stockmarket ;-)

But then turkeys don't vote for Christmas and I'm sure that managers won't vote to sack themselves...

www.locarecords.com

Fairly common...

[Duncan3]

This is by no means a rare situation for publicly traded companies to be in when they have a nasty burn rate.

If the company stays in business, they will soon be worth less, so having a cheap stock price is completely reasonable.

The problem is the people that paid more for the stock refuse to admit the company has a stupid business model and won't give up till the cash is completely gone - which is also very common (the entire dot-com industry for example).

The Arguement

[evilviper]

The argument is that the business isn't going to work because there are too many competitors who do what Liquid Audio does but do it for free.

"Their business model doesn't work."

So, umm... Why did they invest in the company in the first place?

The scoop

[coryboehne]

The real problem is the fact that some of the shareholders are asking to be paid quite a bit more for their stock than they invested in it. Seems fair right?

Wrong.

Even though this company has enough money to do that, it's not their legal responsibility to make sure that the stock holders turn a profit, hell, it's not even their legal responsibility to turn a profit. Effectively if they give away all the money there is no company left. The company is entering into a merger that should hopefully bring stock values up, which will benefit investors in the long run. These people are just being overly aggressive towards the company, and trying to avoid the risk which is inherent in the stocks and bonds game.

Re:The scoop

[JanneM]

For a public company, their responsibility is to make their owners/investors happy, and those are the stockholders. If the stockholders determine they want a profit, that's what the board is obliged to do. If the stockholders only priority is to have all company assets painted light blue, the board will hire painters. The stockholders can force a stockholder meeting (or simply wait until the yearly regular one), and vote to kill off the company and divide up the assets. They could also vote away the board of directors, realign the company as a healing-crystal business or whatever.

If a majority of votes (where the needed majority is regulated in the company charter) decides it is better to just throw in the towel than to continue, that's what will happen.

/Janne

Re:The scoop

[JanneM]

A company is responsible to its employees and customers to the extent of law; this also circumscribes all other ectivities of a company, of course. And if the company is noted on a public bourse, it has to comply with its regulations as well, or be kicked out.

As for the board of directors, as I said, they are appointed by the share holders, and can in principle be deposed at any time. The CEO in turn is appointed by the directors, and can (and sometimes will) be fired for pretty much any reason. A partial reason for a high salary for a CEO is exectly this lack of any job security (though that does not cover the sometimes ludicrous salaries you sometimes hear about).

Many company bylaws are designed to facilitate some kind of balance between the actors and the owners. It can include poison pill regulations, differential voting strength, making the directors shareholders, and what have you.

None of this does however change the basic feature that the company ultimately is there for the benefit of its owners and nobody else. Customer relationships may be very important for a company, but then it is so because that will ultimately benefit its owners more than the reverse. Conversely, some (smaller) companies now have far reaching environmental policies that strictly speaking are not profitable for it in the short or medium term, but that have been imposed on it by its shareholders. This is perfectly acceptable.

/Janne

Re:This is rare....

[bokketies]

They really don't offer anything unique to the market that is worth building a business on.

So does the grocery shop around the corner. Yet it provides a living for the guy that owns the place. He won't get rich, but he survives.

If only firms were allowed to participate in the economy that provide "anything unique", the whole market would be one giant monopoly.

In fact your answer is so extremely conservative I am convinced this is a signal that the bear market is finally over.

The buyout stinks

[cameldrv]

They are offering $3.00 per share in the buyout, less than the cash holdings of the company. They are effectively offering to buy a pile of cash for less than 90 cents on the dollar. The investors are saying "We'll just take the full $3.41, thanks." The management supports the buyout perhaps because of a sentimental attachment to the company, or perhaps because of golden parachutes they may (disclamer: I do not know this) be getting out of the 41 cents.

Re:The buyout stinks

[dcavanaugh]

Obviously, not everyone likes the opportunity presented in the buyout. I can understand how they would rather take their $3.41/share and seek opportunities elsewhere.

The investors are under no obligation to support a sale/merger to a third party, and it's not hard to understand the resistance if the terms and conditions are less attractive than a flat-out liquidation. Why would the investors accept anything less than $3.41 per share, since they get that much with 0% risk???

To me, any substitution of stock for cash would have to compensate the investors for the risk involved. As I see it, Liquid's business model is bankrupt. Nobody is going to buy that company and make any money with it, and everybody knows it. The only thing Liquid has is a pile of cash, so why sell the cash for anything less than face value?

If I was a Liquid Audio investor (thank god I'm not), my attitude would be, "OK, I want Alliance Entertainment to pay me $3.41/share in cash. They can have 100% ownership of Liquid Audio, and can do whatever they want with it. If there is some way for them to make money with Liquid Audio, go for it. If they just want to buy a pile of cash for less than face value, then they can take a hike."

Talk about Nerve

[mbone]

Let's see -

The CEO is making $ 500K per year.

Another co-founder is also making $500K per year.

All of this on revenue of $600 K per year.

And they say that shutting it down would ''...not represent[] the interests of all the shareholders.''

Do the words "bloated" come to mind ?

How about nervey ?

How about stupid ?

In my opinion much of the dot-com money was "value-subtracting," in that they took good money and did stupid things. Enough people did this that it poisoned the ability of real businesses to make real money, because the marketplace was conditioned to assume that things that cost money actually should be free.

I cannot think of a much better example of a value-subtracting business than Liquid Audio.

Shut it down.

Re:They still exist?

[Rich0]

The point is that the company is owned by the shareholders. Sure, in theory they could change their business model and start selling cars instead, but if I were a shareholder I'd rather have the company give me what they can, and invest that in Ford if I wanted to own part of a car company, rather than pay programmers to make cars.

The shareholders own a company - plain and simple. It is in their best interest to serve customers to get them to buy product, and that is the only way they will ever make money from their shares. However, they did not buy shares as an act of charity - they expect a profit. If they want to help the poor of the world they should dissolve the company and vote to give the leftover cash to some needy cause - not just blead the company into bankruptcy.

And the loss would matter because???

[supabeast!]

Liquid Audio = Another proprietary audio format, and this one doesn't even have a big company like MSFT backing it... don't let the door hit ya, guys.

Figures (30 June) and Cash return (15 July)

[mirnav]

Most of it would be invested in short term easily convertable assets. (bank accounts, T-bills)

Liquid Audio has USD 81 mn in cash and equivalents as at 30 June 2002. We should see significant financial income in the Income Statement for the period, but there is only USD 318,000 "Interest and Other Income (net)", which is about 0.4% of USD 81 mn, a funny little return on the cash reserves of the company, even at today's interest rates.

So it looks like the boss is not doing a good job even of money management.

On the other hand, it looks like Liquid Audio IS preparing to give back USD 30 mn cash to its shareholders - their merger agreement with Alliance Entertainment has been amended (15 July 2002) to include this cash return. Check out: http://biz.yahoo.com/bw/020814/140345_1.html

Re:They still exist?

[nathanm]

With that kind of cash reserve, even with no IPR, facilities, or brand, you simply need an ambitious board with some GOOD ideas and the capability to pull it off.

This implies Liquid Audio has a somewhat viable business model, which it doesn't. The shareholders are voting on a proposed merger with Alliance Entertainment soon. Without the merger, Liquid Audio will just keep burning through their cash reserve until it's completely gone.

They have a duty to shareholders to maximize their investments. The best way to accomplish that at this point is to pay off their debts, cash out, and dissolve the company. If they want to radically change their business model, start up a new company and find new investors and capital.

If only it was Real Audio instead...

[illerd]

That would be the day.

Yeah, piss it all away.

[Mulletproof]

My God, people, don't you realize the ace in the hole this company has? 90% of the dotcom's out there would kill for the hard capital this company has. In fact, it's the entire reason the .com bust happened-- All these companmies were venture capitaled to the hilt without any real assets of there own. When they hit the wall, they hurt their investors... Bad. Hell, after umpteen years of existance Amazon.com has only recently posted in the black. And don't think Bezos wasn't sweating bullets every day until that point, because if confindence for one minute faded in his ability, he was so far in the debt hole not even confidence could escape. Not your debt or my debt, but high millions debt. And that's not counting how he had to deal with his workforce (damn near 80% temps-- Hire em, fire em, hire em fire em...) to finally get above water. But for Liquid Audio to actually have assets... Unless the their problems were seriously irrecoverable, that's a major advantage to just piss away. I guess it's all about money now as opposed to long term success. Why not.