Zarlink suitor Microsemi invited to participate in strategic review

By KRYSTLE CHOW
Published on the Ottawa Business Journal website.
July 27, 2011

Click here to view this article on OBJ.ca.

Gary Tanner of Zarlink Semiconductor.
Zarlink Semiconductor’s Gary Tanner.
(Photo supplied)

After publicly complaining it was unable to secure a meeting with Zarlink management, Microsemi officials have been invited to participate in the Ottawa-based company’s strategic review process, according to Zarlink executives.

The announcement was made at Zarlink’s annual general meeting on July 25, which emphasized a focus on future opportunities in mobile Internet, broadband deployment and wireless health-care products.

Chairman Adam Chowaniec told attendees at the meeting that the company is currently “active” in responding to calls and talking to its investment banks about potential buyers’ interest, including Irvine, Calif.-based Microsemi.

Microsemi last week publicly announced a US$3.35-per-share, non-binding offer for Zarlink, a deal that would value the latter at $548.7 million. However, a Microsemi executive told OBJ the company had not yet launched a formal takeover bid for Zarlink, and that the announcement was merely an attempt to restart stalled friendly discussions amid Zarlink’s continuous refusal to meet with Microsemi.

Nonetheless, Microsemi CEO James Peterson has said his company is “steadfast in its pursuit of a transaction with Zarlink” and that it’s ready to “take all necessary actions” to push a deal through.

Mr. Chowaniec noted in an interview after the AGM that Microsemi has been in touch with Zarlink’s bankers but has not yet signed a non-disclosure agreement, which would be the next step in the process.

Zarlink’s strategic review process has so far produced a shareholder rights plan that limits individuals from controlling more than 20 per cent of the company’s voting rights.

Shareholders who attempt to control a greater stake face the prospect of having their position diluted as other shareholders gain the right to purchase additional stocks at a discount.

Mr. Chowaniec said the plan is not intended to block the sale of the company, but to ensure the process is “fair and open” and that all stakeholders receive the optimal value in case of a takeover.

He added the firm is examining all possibilities, which could even mean Zarlink acquiring another company, although there are no explicit plans for the latter.

“All options are open at this point of time; we can’t say the outcome,” said Mr. Chowaniec. “There may be no outcome until we run the process and understand what level of interest there is from various potential partners.”

However, he said there was very little overlap between Microsemi’s and Zarlink’s businesses, and that the local company has had no significant contact with Microsemi in the past.

“From a purely financial point of view, (a Microsemi-Zarlink deal) makes some sense, but from a strategic point of view it makes very little sense,” he said.

Zarlink’s management has said in the past that Microsemi’s three non-binding offers “significantly undervalued Zarlink and its future prospects.”

The company highlighted several of these prospects during the annual general meeting, pointing to the opportunities presented by broadband network deployments in the growing Brazilian, Russian, Indian and Chinese markets for its “strong and stable” line circuit business, which it said grew 34 per cent in fiscal 2011. As well, Zarlink said it stands to benefit from the need for synchronization to make network backhaul more efficient to deal with the soaring demand for mobile Internet, noting that revenues for its timing and synchronization products rose 39 per cent during the fiscal year. Meanwhile, growth in its newer medical products business is outpacing the decline in its legacy divisions such as telecom.

As a result, Zarlink now generates more than 75 per cent of its revenues from its core network timing, line circuit and medical wireless businesses, compared to five years ago when its telecom and legacy medical and custom work dominated its sales. CEO Gary Tanner said the shift, which has been masked by overall top-line sales, indicates “hidden growth” for the company.

“In Q1 of last year, our legacy custom and other product line generated $7.4 million in revenue,” he said in a statement accompanying the release of Zarlink’s first-quarter earnings. “We have strategically managed our exit from that declining business, with these products now contributing approximately $1 million in revenue this quarter.”

Zarlink also pointed to the fact that its cash position has increased by $31.7 million over the past four quarters, with the company reporting cash holdings of $131 million at the end of the first quarter of fiscal 2012.

Still, first-quarter net income dipped to $2.38 million or two cents per share, from $10.26 million or seven cents per diluted share a year earlier, while sales fell 5.5 per cent to $55.43 million. Revenues were at the higher end of the company’s guidance of $54 million to $56 million in quarterly sales.

The firm noted that the quarter included $1.2 million in severance expenses and $1.2 million of stock compensation expenses, with year-earlier profits including $5.9 million in income from discontinued operations.

Zarlink’s 2011 annual report and management proxy circular, which were provided to attendees of the meeting, included several other interesting pieces of information, such as the fact that its head count fell to 519 at the end of the fiscal year, from 584 in 2010 and 606 at the end of 2009, as well as details about bonuses for key executives such as former CEO Kirk Mandy, who took home a fiscal 2011 bonus of $323,000.

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