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Marking the penultimate week in the proxy battle between Micrel (MCRL) and Obrem Capital Management before shareholders weigh in next Tuesday, many industry sources are already leaning toward a victory for the company.
A person close to the company claimed to dealReporter that Micrel has heard nothing but support from its shareholders but did say there has been a dialogue with Obrem. A representative for Obrem said it would be difficult to forecast the vote.
At the end of March, Obrem, which has a 15% stake in Micrel at an average weighted cost of approximately USD 8 per share, requested the special meeting, blasting management’s performance and pressing for a sale. Obrem proposed to remove Micrel’s current board, add one seat and replace it entirely with its own set of directors.
Micrel defended its performance and commitment to shareholder value, asking shareholders to ignore Obrem’s proposals. For advice, Micrel has turned to Goldman Sachs and Latham & Watkins, said the person, adding Micrel is not interested in pursuing a sale at this time but would continue to periodically explore strategic alternatives.
Both sides have a point against the other, according to a senior industry banker following the process. Micrel, which operates in the analog and mixed-signal segment of the semiconductor sector, should probably take part in industry consolidation as it competes with formidable names like Texas Instruments, Analog Devices, Intersil, Linear Technology, and Maxim.
That being said, consolidating Micrel is not a new idea for anyone, the banker added. The presence of 70-year old CEO and founder Raymond Zinn has always served as a major impediment for suitors as Zinn has never been a seller, the banker said. He, along with co-founder Warren Muller, own about 30% of the company’s shares combined, ruling out the likelihood of a hostile offer and allowing Zinn “to run the company as he wants to,” the banker said. “But you have an interesting situation in the industry due to an inability to consolidate,” he offered.
Micrel marks Obrem Capital’s first foray into activism; the company has described the activist’s board nominees as having “very limited semiconductor industry and operating experience.”
According to the CEO of a Micrel peer, Obrem does not have the operational expertise “when it comes down to the guts of running a company.” Obrem has taken a position for war around the time “the sun is starting to rise over the hill,” the CEO said. “The signs we’ve seen from our peers, including Micrel, shows a strengthening in our market space… It’s not robust, don’t get me wrong, but we’re starting to see light at the end of the tunnel.”
“I don’t know how steeped in operating knowledge [Obrem is] but they did get the ball rolling,” the banker commented. Even so, Obrem’s call to push Micrel onto the block is likely to fall on deaf ears as the company has never been considered a “must-have” entity, he said, adding Texas Instruments “could buy them in a heartbeat, make it disappear but they think, ’Why do I need to? I don’t. I’m the one with USD 1bn+ in analog sales. I don’t need more critical mass.’”
There are companies that could benefit from Micrel’s technology but in terms of hot properties, “I don’t know that it’s the hottest,” said an industry analyst. Some of the bigger names like TI and ON Semiconductors would probably be better suited to fill in product gaps with small start-up companies rather than try to tackle a whole new market by buying capitalized companies like Micrel.
The competing CEO added that while Obrem claims optimal synergies in selling Micrel, “The minute you tell the whole world this guy is going to pay a premium, we won’t pay a premium. Downstream, maybe we would, but we certainly would not do it in the heat of fire.”
A small Micrel shareholder said he thought Obrem was making a weak case for throwing out management as the semiconductor industry in general has been in a funk since around 2001 with revenues and high-performance analog not performing that well. “We’re looking at whether they’re good businessmen and does the business generate above average returns on capital? I believe it does. The return on equity and assets for Micrel is good,” he said. “There is a time and place for activism. I just think it’s misplaced here on Micrel,” said the shareholder.
As for what Micrel could do to increase value, the analyst said it should expand its product line but this is highly dependent on attracting the right analog and power management engineers from a finite, extraordinarily competitive job pool.
Because Micrel owns its fabrication facilities, one could propose to sell off and use Micrel’s foundries which could give rise to some interesting economies, said the analyst. Maybe it is cheaper to farm out production to another large foundry, save the investment expense and improve the bottom line, he said. But in the case of analog, one is often better off having their own foundry, he contended; “As an analog person, I’m of the notion you cannot use foundries for everything analog which tends to be a bit specialized,” he said.
Regarding the foundries, the competing CEO said “[Zinn] has elected to keep a foundry and that’s one of the questions these young kids have. Is the fab fully utilized and wouldn’t it be better to utilize it or not have it? The answer there is that they’re correct.”
However, Zinn has been looking to fill the foundries with some solar technology, building acres and acres of a slightly lower margin business, said the CEO, and “Here’s where people with fabs can become extremely wise when the market explodes. No one can get capacity and when I’m sitting at my foundries begging, [Zinn] will be able to control his own destiny. That’s one of the cycles of owning a fab.”
For companies like Micrel, it is sometimes the things that come out of left field like a design-win that would propel it into darling status, said the analyst: “There are things Micrel possesses which could be hidden jewels.
But as for the proxy fight, the CEO contended there are much better ways to work with Micrel than the activist tactic. “If [Obrem] could turn back the clock, I bet you they’d want to sit down with Ray,” he said.
Micrel traded around USD 9.70 per share Thursday.
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