Jul 25, 2002 4 min read

NEW YORK (Dow Jones/AP) – A surprising number of fallen software stars are sitting on hoards of cash, yet most of Wall Street doesn’t seem to care. The selloff in technology stocks coupled with poor financial performance has left many software companies trading at their lowest levels since they were sold to the public.

Despite persistent losses and rapid cash burn, some of these once high-flying companies still are flush with money. And several – including Aether Systems Inc., Commerce One Inc. and E.piphany Inc. – have the dubious distinction of trading below their net cash levels.

That means shareholders could get more money if these businesses shut off their computers, paid off their debts and returned their cash to investors.

That doesn’t include any money that could be raised by selling assets or technology.

“They could be worth more dead than alive,” says George Gilbert, co-manager of the Northern Technology Fund in Chicago.

Take Aether Systems. The Owings Mills, Md., company, which sells wireless software and services, sports a market capitalization of about $161 million even though it had about $197 million in net cash last quarter.

At the end of March, Aether reported $472 million in cash and short-term investments and $276 million in convertible subordinated debt. (The company recently said it repurchased $60 million of the debt.)

It reports second-quarter results on August 7.

“In theory you can buy up all the equity right now, pay off the debt and end up with more cash than you paid,” says Zhen-Hong Fan, a technology strategist at Merrill Lynch & Co. “In reality, it’s harder to execute.”

For starters, you’d have to move quickly.

Despite restructurings and layoffs, many of these companies are consuming cash at a rapid clip. Aether burned through $52 million in the March quarter; while Commerce One spent $59 million in the past three months.

In most cases, there is a good reasons for these depressed prices: their businesses have evaporated and seem unlikely to recover. Commerce One, a maker of online marketplace software based in Pleasanton, Calif., saw its revenue plunge 73 percent to $28 million in the June quarter.

Investors are pricing these companies below net cash “because they don’t believe the executives are capable of managing a (profit and loss statement),” says Vincent Muscolino, a portfolio manager at David L. Babson & Co. in Boston. “Management has burned tons of cash every quarter.”

For example, Redwood City, Calif.-based BroadVision Inc., whose software is used to build e-commerce sites, has exhausted more than $200 million in the past two years, leaving it with about $111 million in cash and short-term investments at the end of June.

Staunching the money drain is hard. Most management teams are reluctant to admit failure, fire longtime staffers and sever customer ties. In some cases, founders still hold a sizable stake and are against selling the companies, once worth billions, at depressed prices.

“Management’s incentive is to stay with it until there is no cash left,” says Warren Kanders, an activist shareholder. “Management is paid to manage assets and the more assets they have the more they get paid.”

There are alternatives to watching a stock languish as a company’s executives deplete its cash hoard as they try to turnaround a failed business. But they can be time consuming and often must be initiated by shareholders.

Companies could pay a special cash dividend to holders, start a self-tender to buy stock from existing holders at a premium to the market price or simply shut down and return the cash. The companies could also look to merge or sell themselves to unlock the value of their cash.

Hedge funds and activists have recently taken the initiative, launching campaigns to push failing, cash-rich to give back some of their stash. The results have been mixed.

Viant Corp., a foundering Boston-based Internet services firm, agreed Tuesday to return $72.5 million of its cash to shareholders prior to a merger. It had previously planned to payout $24 million.

Dissidents led by Kanders won a proxy fight in May over Clarus Corp., a Internet software company. Kanders’ goal was to liquidate the company, which had more than $100 million in its coffers at the end of June.

However, most money managers shy away from these situations because the stocks are illiquid, says Northern Trust’s Gilbert. Also, he cautions, there can be hidden liabilities, such as lease obligations and severance costs, that could drain the cash balance.