Electro Scientific Industries Inc. (NDAQ:ESIO) shares moved up $0.49, or 2.58%, to $19.51 today after Nierenberg Investment Management disclosed an 11.7% stake in the company and expressed their impacience with ESIO as its share price weakens. The activist hedge fund contends that the company continues to depress its return on equity (ROE) by failing to make its excess cash work harder and smarter for its shareholders. Nierenberg has communicated these concerns with the company in the past along with Third Avenue Management - another activist hedge fund pushing for changes. However, despite these communications, little seems to be changing despite the company's January 22nd press release affirming their commitment to shareholder value. Consequently, Nierenberg made an ultimatum saying that time is running out and the time for action is now. If management does not make some immediate changes, it is likely that Nierenberg will pursue board seats in what could become a proxy fight for contorl of the company. Given their large stake and support by Third Avenue Management and other shareholders, it is likely that they would succeed in such a battle.
Just how much cash is ESIO carrying? Well, in addition to to its cash reported on the cash and marketable securities lines of the balance sheet, they also have $1 million from an insurance settlement and $7 million in a litigation bond in Taiwan, which increases cash per shares to $7.73. If ESIO were to restore inventories and receivables to June 3, 2006 levels, and if the above-mentioned $8 million in cash were added, ESIO's total cash and marketable securities would be $8.21 per share - or over 40% of ESIO's share price! ESIO is profitable, cash flow positive, and debt-free... so why has it dropped through 2006 from $25 per share to $19 per share? This is the issue that the hedge funds are trying to address.
What measures is Nierenberg looking for to unlock value? Well, the hedge fund advocates a "tangible and substantial" boost to ROE via a (at minimum) six million shares repurchase with a plan in place to repurchase at least one million more shares annual from free cash flow, asset monetization, and cash reserves. Nierenberg said in a past filing that given the combination of organic growth, increased R&D investment, a number of promising new product releases, and possible acquisitions could enable ESIO to double its revenues over the next three to four years. Management has shared this goal with the public on sevearl occasions. Moreover, given the company's business model, such growth would drive earnings per share north of $2.00, and, in their view, ESIO's share price to $40, more than double its currently depressed level. This makes ESIO a stock
worth watching!
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