SMTC Corporation (NDAQ: SMTX) is barking up the wrong tree according to one major activist investor. Red Oak Partners voiced its concerns with the company's chronic under-performance in relation to its peers. In fact, the electronics manufacturer is the only company in its peer group that has grown neither revenues nor EBITDA during the past three and four year periods. The only thing the company does beat out all of its peers on is executive compensation! Many shareholders feel that these problems require new blood to fix and are demanding change.

Red Oak sent a letter to the board making several recommendations. First, the hedge fund demanded that the company remove shareholder-unfriendly provisions from its bylaws. These provisions may have been necessary in the past, when the company was struggling to raise money, to fend off vultures but they are now outdated. These provisions include staggered board elections and limits on the number of board candidates that can be proposed. The removal of these provisions would allow shareholders to more easily make their voice heard.

Red Oak's second demand was to add a board member and consultant with experience in building and selling manufacturing and assembly businesses. The goal behind this move would be to maximize shareholder value through a sale of the company at some point in the future. With $250 million in revenues and just $12 million in EBITDA, there are huge cost savings that could be obtained through a buyout. These cost savings could be passed on to shareholders through a higher buyout price. To this end, the hedge fund nominated Rich Effress, who has the necessary experience.

The final recommendation made by Red Oak is a change in the compensation committee to ensure objectivity, independence and performance. The compensation at this company is the highest among its peers while its performance has been the lowest - clearly there is a disconnect. The compensation for board members is also too higher, reaching $370,000 in 2006 for only five individuals. This is nearly double that of other companies with its profitability and value. And finally, they recommended a switch from restricted stock to stock options in order to better align management with shareholders.

"As the largest shareholder - by a wide margin - we ask that our recommendations be heard and strongly considered in the best interests of all shareholders and not just for us," said David Sandberg of Red Oak Partners. "We think it is important to begin a meaningful dialog as to the most effective way to enhance shareholder value and address the concerns and recommendations listed above."

Shares moved up over 6 percent on the news Thursday.

Related Companies
Sanmina-SCI Corporation (SANM)
Benchmark Electronics, Inc. (BHE)
Flextronics International (FLEX)