The True Definition of A Net-Net | The Acquirer's Multiple®

During his recent interview with Tobias, Jeff Gramm discussed The True Definition of A Net-Net. Here’s an excerpt from the interview:

Jeff Gramm:
I still love net nets, and we’ve owned, you know, we own Hilltop Holdings as a core position, that was a net net, Purliss. At any given time in our portfolio, we have net nets. You know, today we own two things. Rubicon Technologies, which Tim is the CEO of, that’s a net net now. Then we own this thing Dyatic, DYAI, which we bought as a net net.

Jeff Gramm:
You know, on one level the net net line is an arbitrary line.

Tobias Carlisle:
Yeah.

Jeff Gramm:
The fact it’s like below cash, I mean, it’s …

Tobias Carlisle:
Yeah.

Jeff Gramm:
It just kind of means it’s cheap. You drew a line in the sand. It’s a moving target. It kind of shows you if you have a little bit of discipline and you draw that line in the sand, and that line happens to be trading at a discount to liquid assets, you know, minus all liabilities and you do a little bit of homework on the governance. You can … We’ll still make money that way, and I’m a firm believer in …

Jeff Gramm:
I think that investing is hard, but I think a lot of people tend to kind of overplay how you have to have a differentiated view, and you have to be a deep thinker. You have to be the brightest guy in the room and you have to beat the other guy that’s on the other side of the trade. I’m just like, I don’t believe that. I think usually when I’m buying a stock, the guy on the other side of the trade often knows that I’m getting a good deal.

Tobias Carlisle:
Yeah, it’s a false setup.

Jeff Gramm:
They want to sell for whatever reason they have to sell. A lot of it is really supply, demand, and balances.

Tobias Carlisle:
Yeah, I couldn’t agree more. Do you want to discuss Tandy Leather?

Jeff Gramm:
Sure. I mean, so that was a classic same situation. It was extremely cheap, I went down to meet with the company. I thought they were nice and honest. It seemed like they knew their business, and there was a 16 percent holder, Wellington. For some reason they owned 16 percent of this very small company. It was probably 30 million or 35 million TEV at that point.

Tobias Carlisle:
Was it a net net or a near net net?

Jeff Gramm:
No. No, no it wasn’t. I think it was about like 20 or 30 million dollar market cap, and then they had some cash, but they only had like five or 10 million cash. Not that much. They were building cash.

Tobias Carlisle:
I get the feeling that it was at one stage because they have a lot of inventory. I think that was …

Jeff Gramm:
Yeah, well, I don’t count inventory.

Tobias Carlisle:
That’s really … I think the old definition, the grand definition we have to write down. You get 100 cents on the dollar for cash, you get 75 cents on the dollar for inventory, or maybe it’s 60 cents for inventory. It’s 75 cents for payables, something like that. I think on that basis it was.

Jeff Gramm:
Yeah, no, yeah, when I say net net, like I mean cash and liquid investments.

Tobias Carlisle:
You mean cash.

Jeff Gramm:
Yeah. Yeah, that’s what I mean. I might be using the word wrong. So net cash. That’s, so with Hilltop and Dyatic and Rubicon and Purliss, we’re all …

Tobias Carlisle:
Net cash.

Jeff Gramm:
Cash on the balance sheet, subtract all liabilities. That’s the, you know, so Tandy didn’t get there.

Tobias Carlisle:
Right.

Jeff Gramm:
But it was cheap, and Wellington just decided to blow out one day. I got to buy at a price where the company probably should have bought it, but they had a policy where they only bought back blocks at a six percent discount to market.

Tobias Carlisle:
Mm-hmm (affirmative).

Jeff Gramm:
I got that block. It just was this kind of weird supply, demand, and balance. Now, it later turned into a debacle. I’m on the board now, and we’re going through an accounting restatement. If you’ve ever gone through an accounting restatement, it’s pure misery. When I bought in, it seemed like the liquidity demands of the biggest holder set the price at the wrong level.

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