Friday, January 16, 2015

2 Micros For the Price of 1

It would be fair to say that O2Micro (OIIM) is poorly managed. Tangible book value per share is at the same level at which it was 10 years ago, even though not a single dollar of dividend has been paid out in the interim. The company is losing money. But the stock price reflects this poor management, and the losses and then some, as the stock has fallen by 80% over the last 10 years, to trade at a huge discount to book value.

This isn't some ordinary book value made up of equipment, overpayment for acquisitions or other such nonsense. The company has a lot of cash and owns a bunch of real estate that adds up to over $100 million, while it trades for just $60 million.

If management had a lock on this company, they could keep drawing their stipends indefinitely and this would most certainly remain a lousy investment opportunity. However, insiders own only 7% of the company, whereas an activist investor has now taken a stake and is looking to realize value:

Lone Star Value sees significant value in the Issuer’s patent portfolio and believes that its current trading levels – in which a negative enterprise value is being ascribed based on the current share price – reflect a lack of confidence in the current management and Board’s direction for the Company. Lone Star Value believes the Issuer can be a profitable enterprise and wishes to engage with management and the Board in raising the value of Issuer’s shares through discussions on improving the Issuer’s operational focus as well as realizing the value of its intellectual property and long term investments, all of which Lone Star Value believes can meaningfully enhance shareholder value.

In Lone Star Value’s view, the Issuer could unlock shareholder value by streamlining its operations, using its cash to repurchase shares or issuing a dividend, potentially liquidating certain or all of its equity stakes currently listed as long term investments, and licensing its intellectual property.
While management owns only a small part of the company, the board of director elections are staggered, meaning outsiders can't replace the board in one year. If management chooses not to co-operate with shareholders, therefore, this could be a drawn out affair. Hopefully they do and everyone can win.

A good breakdown of the company's assets is available here.

Disclosure: Author has a long position in shares of OIIM

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