Shares of Napster (NASDAQ: NAPS) rose more than 27% on Friday on speculation that the online seller of MP3s could be a takeover target at its current depressed share price.
The bullish case is easy to understand. The Napster name and site must be worth something and, before Friday’s run-up, the company had a market cap of $52.1 million and $69.8 million in cash. Given Napster’s iconic status as the beginning of music piracy, it’s hard to envision that the stock could be so cheap. Wouldn’t the brand be worth something to anyone in the music download business? It’s instantly recognizable and it would take many millions in advertising to create such a brand from scratch.
So I’m in complete agreement with the shareholders and analysts — this company should be sold, and such a move would likely generate tremendous value for shareholders. But there’s another side: as a stand-alone public company, Napster is a ticking time bomb.
I say this because, as an investor, I’ve been tempted by shares of Napster for three years or so, precisely because of the cash horde and its close proximity to the company’s market cap. The problem is that the book value and market cap have been chasing each other down since the company’s inception (it was formed out of the bankruptcy of the original Napster in the wake of lawsuits). Take a look:
Period Ending FY2008 FY2007 FY2006 FY2005 FY2004
Common Equity $72.30M $84.71M $115.77M $171.39M $143.02M
Common Shares Outstanding 46.12M 44.77M 43.83M 42.96M 33.54M
Book Value Per Share $1.57 $1.89 $2.64 $3.99 $4.26
The company lost $16.4 million in FY2008 and, unless the company makes a miraculous leap to profitability in the current year, any target price based on book value will continue to decline.
This is definitely a stock for deep value investors to look at, but the ideal thing for shareholders would seem to be selling the company now and stop the bleeding, leaving the bottom fishers with a hefty return.
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