- Blackrock just took a 6% stake in WPCS International
- WPCS is a $3 million communications company with steady revenues
- It was once valued at over $1 billion
- Its profit margins have never been satisfactory for its industry
- Blackrock’s stake may be signaling a takeover by a more efficient communications firm
Blackrock (NYSE:BLK) is the largest asset manager in the world, and for some reason it just took a significant stake in a tiny $3M communications company. Using the word “large” in reference to Blackrock doesn’t begin to describe its size. Blackrock has $4.334 trillion in assets under management. That’s 25% of the national debt. Or to put it in even more surreal terms, that’s 40% of the entire circulating United States M2 money supply according to Federal Reserve statistics.
That means, four out of every ten dollars circulating in the American economy today is under Blackrock management.
An aside, but if you want to know why price inflation has been so low, one reason is that 40% of the money supply is stuck behind the monetary dam that is Blackrock and fed to the capital markets instead of consumer markets.
Blackrock takes major stakes in companies all the time. In fact, on February 3 alone it filed no less than 155 Form 13G’s reporting 5% or more stakes in different companies. These acquisitions don’t tend to make the headlines. If they did, the news would be pretty boring.
However, sift through it and you’ll find something strange. One day previously on February 2, Blackrock took a 6% position in a small communications company called WPCS International (NASDAQ:WPCS). WPCS is a $3.2M market cap 23 cent NASDAQ listed stock, which is an enigma in itself aside from Blackrock taking a major stake in it.
If you’re wondering why WPCS is listed on the NASDAQ despite its tiny market cap and share price, it’s because WPCS wasn’t always so small. At its peak, WPCS was valued at $1.3B as recently as 2007. Its problem, even back then at its highs, was that it could not keep its costs down. Gross profit margins, even in the best of times, were razor thin.
Razor thin margins is of course perfectly fine if you’re in retail or restaurants and your competitors are also clinging to the same margins. It’s not perfectly fine if you’re in communications services where your market-leading competitors gross profit margins are consistently in the 70-75% range like SBA Communications (NASDAQ:SBAC) or American Tower Corporation (NYSE:AMT).
WPCS continues to pull in respectable business and revenues as a multinational company. It just never had the economies of scale to bring costs down in the face of competition and become comfortably profitable. So why did Blackrock take a 6% stake?
Office Depot, Staples a Clue?
Back in December, a small (certainly compared to Blackrock) $3 billion hedge fund called Starboard Value took a 6% stake in Staples (NASDAQ:SPLS), at the same time raising its stake in Office Depot (NASDAQ:ODP) to 10% from 8.6%. Two months later, Staples agreed to acquire Office Depot for $6.3B.
Granted, Starboard was actively encouraging the two companies to merge, and positioned itself to profit in that event. Is Blackrock similarly positioning for a takeover of WPCS by a larger communications company with the capital and efficiency to take advantage of WPCS’s revenue stream?
By the numbers, WPCS looks like an attractive buy for a communications company with bigger gross profit margins. Consider: WPCS has a market cap of just $3.2M, but has liquid assets on its balance sheet of 4.5x that at $14.4M. Add to that the fact that WPCS just eliminated all of its secured debt by shedding a failed Bitcoin venture and is on track for over $35M in revenue for 2014, close to a 66% increase over 2013, it’s still alive if still inefficient and looks ripe for someone to take it over on the cheap.
The chances of WPCS, after years of failing to get costs down even at its peak, suddenly becoming sustainably profitable are slim. Blackrock knows this, and doesn’t normally invest in microcaps of WPCS’s size. It seems likely that the $4.3 trillion manager is anticipating a takeover soon.