Electro Scientific Industries Inc. (NDAQ:ESIO) moved up $0.82, or 4.22%, to $20.26 this afternoon after the company's largest shareholder, Third Avenue Management LLC, changed their filing status from a Schedule 13G to a Schedule 13D. This more activist stance came as a result of the TAM's disappointment with the company's stock performance. Consequently, TAM recommended that the Board of Directors explore possible share repurchases and/or extraordinary dividends in order to unlock shareholder value. In a letter, the firm noted that "were the Board to consider a return of capital to shareholders, as I suggest it does, my sense is that some combination of a one-time dividend (say $2 per share) and a committed, long-term share repurchase program would effectively balance the needs of the corporation and those of the outside passive shareholders like TAM."

These demands come not long after Nierenberg Investment Management expressed similar beliefs in their Schedule 13D/A filing with the SEC. The hedge fund noted that ESIO shares could be worth as much as $40/share in three to four years if management took steps to unlock its value. In their analysis, they noted that ESIO has an additional $8 million of cash, not included in the cash and marketable securities lines of the balance sheet, $1 million from a subsequent insurance settlement and $7 million in a litigation bond in Taiwan, which increases cash per share to $7.73. Moreover they said that, if ESIO were to restore inventories and receivables to June 3, 2006 levels (and they believe both ultimately can be reduced even more), and if they were to add the above-mentioned $8 million cash, ESIO's total cash and marketable securities would be $8.21 per share, 43.2% of ESIO's share price at the close on January 9.

The fact is that ESIO is profitable, cash flow positive, and it has zero debt; however, its share price has dropped from a $25 high in 2006 to $19 before rebounding to its current levels. Consequently, two activist shareholders are now demanding that something be done to solve the problem, and this makes ESIO a stock that is definitely worth keeping an eye on over the new few months!

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