written by reader Buy $400 million in cash for $50 million

By sparky, December 27, 2011

Essentially that’s what you’re doing when you buy shares of QXM, a Chinese phone manufacturer with $400 million cash on its books. Sounds like a great opportunity, but of course, with great opportunity there is also great risk. So in true Stock Gumshoe tradition, I will attempt to write a balanced summary on this company and outline why this unique investment presents itself at this time.

The stock went public about 5 years back with incredibly bad timing as Blackberry and Apple were about to assault China. Besides battling those two behemoths, the company was busy fighting cheap counterfeit copies of its own CECT telephones. As a result, what might have seemed like a good idea at the time went south very fast and the stock has pretty much been on a downward spiral since its NYSE debut.

QXM has only 58,000,000 shares outstanding and over ½ of those shares are owned by its parent company, XING, leaving a float of about 28,000,000. It’s thinly traded and this small float can make it volatile. Late in the 4th quarter of 2010, XING offered to buy out QXM minority shareholders with an offer of 1.9 shares of its own stock + .80 in cash. This sent QXM stock up to almost $6.00 per share. But, in April of 2011, the buyout offer was rejected by the minority shareholders (perhaps not the wisest decision ever made) and both stocks have near totally collapsed since that time.

Since the failed buyout, XING has been determining how best to acquire QXMs assets. One possibility would be an inter-company loan. This is perhaps the least desirable alternative for QXM shareholders, but it would be more appealing if the interest on the loan would be paid to shareholders as a divvy. Another option would be to just dismantle the company and distribute the cash (about $7.00 per share) but that is most unlikely. One troubling item is that at the present time, both companies share the same CEO. I’m not at all sure how he can legitimately serve both sets of stockholders since they have naturally conflicting interest regarding distribution of the cash.

The largest of the minority shareholders and the one primarily responsible for scuttling the buyout is Shah Capital Management with 5,700,000 shares. Most encouraging, is that in the 3rd quarter a large position (732,633 shares) was taken by famed value investor Francis Chou – the former telephone repairman who became filthy rich with Fairfax Financial and is now manager of Chou Associates.

The initial buyout offer failed in April, and I would expect that by the end of the 1st quarter 2012, XING will have decided how best to dispose of this company to get its hands on its share of the cash. If it tries to shut the minority shareholders out completely, there will be plenty of lawsuits holding things up, so I’m looking that they will look to appease them in some fashion and a happy ending is had for all.

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