PLX Technology May Be Sold By Year's End To Avoid Proxy Fight

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 |  About: PLX Technology, Inc. (PLXT)
by: Activism Analysis

For my first article, I'll be looking at PLX Technology (PLXT), which is facing a proxy fight for board control from Potomac Capital Management. PLXT currently trades at $5.50, and its market cap is $250 million. I believe it may be sold for a substantial premium (perhaps for $7-$10) by the end of the year, in order to avoid Potomac's proxy fight.

This idea, as will be the case with most of the ideas in my articles, will aim to take advantage of a near-term activist-related catalyst. I've spent several years studying shareholder activism, and I've learned to spot when the market hasn't been giving an activist enough credit for its campaign. I believe Potomac's fight at PLX is one of these situations.

Company background:
PLX provides "silicon and software connectivity solutions," mainly through its PCI Express switches.

Activist background:
Potomac Capital Management has been very successful lately. Two (MEMSIC and STEC) of Potomac's last three targets have been acquired. Sigma Designs is the third target, and Potomac got board seats there. Potomac is a small hedge fund, and it doesn't file 13F's. PLX is the largest of its seven disclosed positions.

Campaign background:
Last year, PLX faced a similar proxy fight from Balch Hill Capital (which worked with Potomac in a proxy fight at STEC earlier this year, resulting in a sale a couple weeks before the annual meeting). Balch Hill announced its campaign at PLX in February 2012, and in April 2012, PLX agreed to be acquired by Integrated Device Technology for $7/share in cash and stock. The 14D9 background of the transaction confirms that Balch Hill moved the sale process along (see page 14 of first document). However, the merger fell apart at the end of the year after antitrust challenges.

Balch Hill sold out after the merger was announced, but in January 2013, Potomac bought in, announcing its 5.1% stake in a 13D while the stock was near $4.80. In its 13D, Potomac asked for the company to sell itself again, as the go-shop after the IDT announcement had found other offers, including an all-cash offer.

Last year, PLX held its annual meeting on December 19, which means we should expect the 2013 annual meeting to be held around then as well. In March, Potomac announced a proxy fight for five of eight board seats (the early notice was a result of a bylaw quirk that didn't expect a December meeting). On June 27, Potomac, now a 9.4% shareholder, sent a demand for books and records related to alternative acquisition proposals to the 2012 IDT merger. The company hasn't yet responded publicly.

Potomac's case centers on the fact that Deutsche Bank's May 2012 go-shop found a competing all-cash proposal, although the company rejected it as not superior to IDT's offer. No price was disclosed, but presumably the offer was close to $7. Potomac wants details on that offer and wants PLX to auction itself. Potomac said in January that the company's operations and outlook were far stronger than they were in April 2012, and that the company should thus be able to fetch an even higher price now.

Analysis:
A few things point to a sale being in the works in the next four months:

1) Last year, the board agreed to a merger after activist pressure.
2) PLX has been essentially ignoring Potomac, at least publicly. It appears to expect to not have to deal with Potomac at the annual meeting.
3) Potomac has an excellent track record in the past couple of years.

Here are some counterpoints that suggest that a sale is less likely:

1) The company appointed a new CEO in December 2012. He likely wants a chance to run the company.
2) If you read the 5/22/12 14D9 (linked to earlier) filed in connection with the IDT merger, the company was reluctant to sell in the first place. IDT was just a very attractive merger partner (in fact, apparently too attractive, as the FTC rejected the merger).

Company fundamentals:
Fundamentals look OK, but are difficult to analyze, since the company only recently returned to profitability. Analyst estimates aren't all that useful, since there are only two, but the company is expected to make 30 cents per share in 2013 and 47 cents in 2014. The 2013 P/E of 18.3 is pretty attractive, given the growth expected.

The most useful financial item that has been consistent in the past year or two is revenue, which looks to be about $108 million this year, and has fluctuated between $100 million and $116 million in the last three years. That $108 million revenue figure gives the company a reasonable 2.3x P/S ratio at its $250 million market cap, lower than the 2.7x it obtained in its April 2012 transaction with IDT. Now that the company's expenses are lower, and it's actually making money, presumably it should command a higher valuation.

Conclusion:

The most likely timing for a sale announcement is late October, when earnings are announced. If not then, the weeks before the December annual meeting could also see a sale announcement.

While I do expect a sale by the end of the year, I think the stock will outperform in the next few months regardless, given the recent growth in profit. If the company doesn't sell, it would likely be because the company is worth more than $10, in which case the stock would probably increase after one or two quarters of earnings.

I'm assuming a sale would be in the range of $7-$10, as that would represent a reasonable premium to today's price, but I could certainly be wrong. If you have some thoughts here on valuation, I'd like to hear from you in the comments. I'd also like to hear from you if you disagree with my analysis; always good to hear the other side of the argument.

Please note that I'm not weighing in on whether the company should or should not sell itself. I simply believe it will (or will have a good reason for not doing so), and that the stock price will go up.

Disclosure: I am long PLXT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.