MRV Communications: Vitesse Semiconducter Redux?

Includes: MRVC, VTSS
by: Andrew Schmitt

The consolidation of MRV Communications, Inc. (NASDAQ:MRVC) & Fiberxon is a healthy force for the industry, but one made at the near term expense of shareholders (see MRV, Luminent, and Fiberxon). The rest of the optical component industry will see the benefits of consolidation, but MRV shareholders have lost nearly 30% of their investment since the merger was approved.

MRV has much in common with Vitesse Semiconductor (NASDAQ:VTSS), a company currently targeted by the activist fund ChapCap partners.

• A business that appears fundamentally undervalued in a sector ripe for consolidation.
• Debt holdings with default covenants triggered by a lack of financial compliance
• Executive departures
• Large cash expenses associated with audit compliance
• Questionable decisions and actions made by board members
• Board members that appear to lack independence. Four of the officers and directors are related through family connections.
• Shareholder lawsuits (not yet with MRVC, but I would expect them to be imminent if the company is de-listed)

Like Vitesse, MRV is an ideal activist target. The problem may be that the company is de-listed, and enters the same domain as Vitesse, where no annual meetings are held and therefore no directors can be replaced by proxy.

Disclosure: Author owns no position in MRV, and an immaterial short position in Vitesse Semiconductor.

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