DSPG: Will Monday's Deal Herald A Breakthrough?

On Monday, DSP Group Inc. (DSPG) announced that it acquired the cordless and terminals business of NXP Semiconductors of the Netherlands for $200 million in cash and $70 million in shares. In addition, DSP Group will pay up to $75 million payable based on reaching certain milestones.

The Dutch company, which was formerly a division of Royal Philips Electronics (PHG), is selling the two businesses in order to focus on the design of chips for entertainment and media applications. Investors and analysts will view this move positively, since it is a welcome development for DSP Group. The company looked liked it was losing market share to the competitors and Wall Street will welcome any action that will change the current stalemate for the better.

If we compare the return on DSP Group's stock with similar companies, such as Marvell Technology Group (MRVL) or any of the other 17 semiconductor chip manufacturers on the Semiconductor Index, it becomes clear that DSP Group's shareholders actually do have reason to complain. The stock did go up and down together with the semiconductor field and with the expectations of what would happen in the field as a whole, but the fact that a stock behaved "just like the entire field" did and ultimately lost money for its owners, is hardly any cause for celebration.

Even more severe is the decline in business which began last year, and which continued into the first quarter of 2007 with full-year guidance that was not encouraging. When a company that is competing in a market dominated by giants begins to lose business (no matter what the reason is) a problem is created which, history has shown, can become more aggravated and extremely difficult to rectify. Since the deterioration in results is obvious, I sense that the acquisition of these two businesses, despite being ideal for DSP Group and preferable to what was before, was made more out of the company's situation and pressure on the CEO to finally take action, rather than any strategic plan.

I feel this way because DSP Group failed to utilize the years 2002-2006 in order to unlock value (and let its shareholders down as a result). It failed for two reasons - first there was its failure to exploit the good opportunities that were on the market since 2002 to sell the company at a premium. The other reason is that since 2002, the company has not used the cash it has had on hand make itself a lot larger, through mergers or acquisitions (as many other companies in this field did). Why this happened, especially with an excellent executive management like the one DSP Group has, is beyond me. I feel that the current acquisitions were essentially an opportunity upon which DSP Group stumbled and transacted in order to placate its irate shareholders, rather than any real strategic program. Otherwise it would have happened long before Monday.

DSP Group's chairman and CEO Eli Ayalon first took over the reigns 11 years ago, becoming chairman as well in 2000. Last year the company appointed Dr Tal Simchony as president. Simchony was previously CEO of Veraz Networks in San Jose, California, and also executive VP and COO at ECI Telecom. I feel that DSP Group should have done what NXP did - focus on a niche in which it has an advantage.

Disclosure: The author invests in various equities and may have a personal holding in the stock of companies named.

DSPG 1-yr chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

Comments

[royial:]

Why Shlomo not write anymore in globes site?
Someone know where shlomi write his articles today?

Thanks.

2007 Jul 02 12:26 AM