NEW YORK (
) -- An innovative tax strategy has helped a little known company defy gravity, gaining more than 30% despite the broader market sell-off since the May 6 "flash crash."
was a shell company that traded on the pink sheets for years until moving to the Nasdaq on June 11, but
could have implications for other companies with similar tax assets, including
Ford Motor Co.
Clarus was a developer of e-commerce software that went public in 1998, and raised $250 million just as the Nasdaq peaked in 1999. The business began to struggle, and a group of dissident shareholders, led by Warren Kanders, pushed their way onto the board in June 2002 to orchestrate a dramatic shakeup of the company, which was based in Alpharetta, Ga. They slashed expenses to preserve the remaining cash and look for an acquisition to take Clarus in a new direction.
"When you're going 120 miles an hour into a brick wall, you can either hit the wall or put the brakes on, so I chose to put the brakes on and re-direct the corporate energies into trying to find an area which would be in my opinion more responsible to the desires of the shareholders," Kanders told
in a recent interview.
Clarus then spent some seven years as a shell company, with no profits and $80 million in cash, trolling around for a business it could acquire.
Kanders, a former
investment banker who became Clarus's Executive Chairman in December 2002, was well suited to the task. In 1996, he took a controlling stake in a $6 million Florida-based company that made body armor for policemen. He ended up turning
into a major defense contractor that sold itself to
in 2007 for $4.5 billion.
One of the big incentives for Clarus to make an acquisition was a $89 million deferred tax asset. The asset was the result of net operating losses from Clarus's software business that could potentially be carried forward to be offset taxes on profits in the future. To find the profits, however, Kanders and Clarus needed a business.
They finally found one --two, actually, which sell equipment for outdoor sports including mountain climbing and skiing. Clarus announced the purchase of Sacramento Calif.-based Gregory Mountain Products and Black Diamond Equipment in Salt Lake City on May 10.
As a result of the deal, Clarus has said it expects to recognize "a significant portion" of the deferred tax asset, a benefit Kanders says will "flow through our
profit and loss statement...I think you'll see that in the second quarter." In other words, it seems highly probable Clarus will show a sizeable quarterly profit fro the first time in years.
Robert Willens, a longtime Lehman Brothers executive who now runs his own consulting firm, has been keeping a close eye on Clarus, as he believes its strategy can be replicated by a host of companies that, as a result of the financial crisis, are sitting on big net operating losses (NOLs) that they could "monetize" through acquisitions as Clarus is doing.
"There are probably more NOLs sitting on corporate balance sheets than at any time I've seen in my career," Willens says. Willens believes CIT Group, on which he published a separate report, is a particularly good candidate to do such a deal.
Willens says Clarus will have to prove, if challenged by the Internal Revenue Service, that tax avoidance was not the primary motivation for its acquisition. Clearing such a hurdle is fairly easy, Willens says, but it probably explains why Kanders downplays the deal's tax benefits.
"The tax is icing on the cake. We're aware of it, but that was absolutely not the driver," Kanders says. He says Clarus brought the benefits of a ready-made public listing to Black Diamond and Gregory, sparing them braving the IPO market.
"It's a very difficult time to take companies public and this is an instant way to do it," Kanders says. "We do not need to get shareholder approval to enter into this transaction; we do not need to go through an offering process/road show where the banks are going to knock the price down just to get it done."
Clarus's life as a shell company looking for an acquisition target makes it similar to a special purpose acquisition company (SPAC) -- a Wall Street deal fad that was cut short by the crisis. SPACs raised money through public offerings first, and then went out looking for acquisitions.
Kanders was previously involved with a couple of SPACs, but appears to have gotten in too late to capitalize on the trend. One called Kanders Acquisition withdrew plans for an IPO in fall 2008, while Highlands Acquisition, where Kanders was a director, dissolved in September 2009 and returned the money it raised to shareholders.
A key difference with Clarus was that shareholders didn't need to approve the deal with Gregory and Black Diamond. While SPACs need two thirds of their shareholders to approve an acquisition, it is much easier for other companies to structure a deal that does not require a shareholder vote.
Clarus is now putting the final pieces together to solidify its new identity. Long ago exiled to the pink sheets, it got a Nasdaq listing and a new ticker symbol earlier this month.
"I prefer to call it a renaissance -- I hope. I don't know that it's necessarily a phoenix," Kanders says.
Written by Dan Freed in New York