Small Caps Bounce High; Who Will Buy Metalink?

by: Shlomi Cohen

On summing up the returns yielded by the key indices in the US since the beginning year, an interesting picture emerges. The Russell 2000 Index, which is composed of 2,000 small US companies with market caps of around $1 billion, fell 7.3%, while the other indices plummeted by almost double this much. The Dow Jones Industrial Average and the S&P 500 both fell 14.3% since the beginning of the year, while the Nasdaq fell 12.9%. This gap is apparently the result of the fact that as stakes bounce off recent lows, small caps which surprise with good results, or are expected to surprise, soar much higher than large caps with similarly positive surprises.

Two of the Russell 2000-listed stocks in my portfolio tracked by "Globes", Sigma Designs Inc. (NASDAQ:SIGM), and Omrix Biopharmaceuticals Ltd. (OMRI), have turned in a stellar performance since the beginning of the month. Sigma has risen 25% and Omrix has gained 21%, a gain which has been attributed to rumors that it could be acquired.

As for system-on-chip maker Sigma, after tumbling from its January high of $73 to $13.50 at the beginning of this month, it has now rebounded to $17.50. The share is being picked up on the market ahead of the company's results which are due at the end of August, but the short traders are not giving up without a fight and still hold short positions on 40% of the company's share capital.

The collapse in Sigma's share price happened as a result, among other things, of an accumulation by AT&T Inc. (NYSE:T) of an inventory of set-top boxes for its IPTV project, which led at the beginning of the year, to a fall in demand for Sigma's video processors fitted in these set-top boxes. AT&T's report last Wednesday lifted the fog slightly, since this project appears to be making progress and plans for investment are moving full speed ahead, with the goal of reaching one million subscribers by the end of the year. In the worst case scenario, even if producers have found themselves stuck with inventories of set-top boxes recently, these are now dwindling and orders for processors have probably already been renewed, or will be in the near future.

Another member of my portfolio which has just made a quantum leap of its own is LanOptics (EZCH) which, had it not been listed in Israel, have would joined the Russell 2000 Index long ago. LanOptics rose 23% last week and by 32% since the beginning of the month, canceling out its entire loss since the beginning of the year in the process. LanOptics sells its network processors to leading producers of switches and routers for Ethernet-based networks, which are the infrastructure backbone for the broadband access that Internet service providers offer.

It is no secret that Juniper Networks (NYSE:JNPR) is a major customer for LanOptics' NP-2 product line, and Cisco Systems Inc. (NASDAQ:CSCO), through Marvell Technology Group (NASDAQ:MRVL), is purchasing its NP-3 range of processors. LanOptics will unveil its second quarter results next Monday, and should it issue guidance as well, it is likely to report strong growth.

Juniper issued its own second quarter report last Thursday after the bell, and soared 18% on Friday (Call Transcript). Whether this gain amounts to a snapshot of the kind of results Cisco is likely to announce when it reports next Tuesday is by no means certain, but it is clear that the telecom sector, at least, remains a strong business for both companies, which have making large-scale investments in broadband infrastructure, a development which I believe bodes well for LanOptics too.

Specifically, it is known that LanOptics' NP-2 processors are fitted in Juniper's MX router family, and sales of these routers reached an annualized rate of $300 million in the quarter ended June, compared with $200 million in the same quarter in 2007, which ensured LanOptics also enjoyed strong growth in the second quarter. I believe there is a very good chance that LanOptics's third quarter will be exceptionally strong with a swing to substantial profit, since it looks increasingly likely that in addition to Juniper, Cisco is also moving ahead full speed as far as the integration of the NP-3 in its platforms is concerned.

Metalink's options

On Sunday, Metalink (OTCQB:MTLK) officially announced what many have sensed for months - that it was putting itself up for sale, either outright, or partially through an alliance with a strategic partner. I find it hard to envisage the partner option materializing, since the potential candidates for such a partnership are the giants, and it does not seem logical to me that they would want to get themselves involved in complicated partnerships. Either alternative would amount to tens of millions of dollars, which is small change for them, so an outright acquisition would be preferable to the cumbersome task of working out the financial terms of a partnership.

Having spent tens of millions of dollars over the last six years developing its state-of-the art wireless chips for the networked home on the 802.11n standard, there are those who automatically name the sector's giants, Broadcom Corp. (BRCM) and Marvell as the most likely candidates to take over the Metalink technology, said by some in the market to be superior to that of both companies. I think that in actual fact, a company that currently does not have a wireless solution of its own would be both far more suitable and willing to pay a lot more, and one such company that comes to mind as the ideal candidate is German chip giant Infineon Technologies AG (IFX). It has managed over the past year, thanks to a string of acquisitions, especially from Texas Instruments Inc. (NYSE:TXN), to become number two after Broadcom in chips for ADSL customer premise devices.

The home market is moving towards the adoption of a solution that will see one set-top hub offering a range of high speed broadband solutions, both wireline and wireless, and when it comes to the latter, Metalink can offer ready made solutions that Infineon does not currently have, thereby saving it many years of development. The two companies are no strangers and once competed head-to-head in the VDSL market, in which Infineon is now the leader ahead of the struggling Ikanos Communications (NASDAQ:IKAN). Infineon also built its VDSL niche around a technology it acquired from a small Israeli company, Savan Ltd., which was located in South Netanya, not far from Metalink (which is headquartered in the Yakum Industrial Park).

SanDisk - What goes around comes around

To close, a few more words on SanDisk Corporation (SNDK). The last two pieces in the jigsaw that embodies the world of flash in the summer of 2008 will fall into place this week when Toshiba (OTCPK:TOSBF), unveils its results today, followed on Thursday by Hynix Semiconductor (KSX:00660), but last Friday's report by Samsung Electronics Co. Ltd. (KSX:5930) was exceptionally interesting. Although it now believes that the NAND market is unlikely to recover in the coming quarters, Samsung, unlike SanDisk, has not cut a single dollar from its budget for building flash production lines, and in practice, in terms of byte sales, it will actually increase its market share at the expense of Toshiba and SanDisk. It was only a year ago that people said the opposite would happen.

If the state of the flash market worsens, as many are predicting, and SanDisk's financial situation deteriorates along with it, we could well see a situation next year where Toshiba acquires its partner SanDisk together with its entire patent portfolio. If this happens before SanDisk's current royalties agreement with Samsung expires next summer, Toshiba may feel it has to stop its bitter opponent Samsung in its tracks, and the only way to do that would be by refusing to sign a new licensing agreement with it.

Disclosure: None

Published originally by Globes [online], Israel business news -

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.