Exar Corp.: Turnaround And $16 Buyout Playing Out According To Script

by: Valuable Insights

Exar reported its fiscal 4Q12 results, its first under the leadership of CEO Lou DiNardo, on May 3rd, and it went according to script. The results were basically in-line, but the guidance of 5-10% q/q revenue growth and EPS of $0.01-$0.03, was soundly above expectations. The EPS guide demonstrated particularly solid leverage (well ahead of the break-even estimate), and reflects lower quarterly op-ex from the $22 million of annual operating costs eliminated in the March quarter.

When we did our initial write-up on Exar on March 26th, we noted that our positive thesis is predicated largely on DiNardo's interest in turning around Exar, and then selling the company. His compensation package, which we detailed at length, is driven to an unusual degree by positive stock price performance, and operating results. Also attractive to us is that cash, plus NOLs, plus PP&E, are worth $8+ a share.

So it was of little surprise that Exar management guided above the Street for the June Q (1QF13) - we'd expect that for the course of FY13. Notably Mr. DiNardo needs Exar to grow top and bottom line each quarter throughout FY13 to maximize his incentive package.

While we found Exar's results and commentary comforting, our best confidence boost of the week came from Microchip's (NASDAQ:MCHP) acquisition of Standard Microsystems (NASDAQ:SMSC) for a 41% premium to SMSC's previous close. While Microchip and SMSC play in the microcontroller segment, that segment like analog/mixed-signal is consolidating. Part of our thesis is that after a couple of years of clean-up and turnaround, Mr. DiNardo will be a willing seller.

Texas Instruments (NYSE:TXN) paid a 78% premium a year ago to acquire rival National Semiconductor. After a clean-up, Exar could be acquired very reasonably at 8x-10x EBITDA (likely ~$40 million, which is well below the company's long-term targets) plus the value of cash, NOLs and PP&E, or $16 a share. We think there will be no shortage of interested buyers including TXN, Maxim (NASDAQ:MXIM), Linear (NASDAQ:LLTC), Microsemi (NASDAQ:MSCC), On Semiconductor (ONNN), or many others.

Also notable about this week's transaction is that SMSC's CEO is Christine King, who was formerly CEO of AMI Semiconductor. Ms. King sold AMI to On Semiconductor back in 2008. In other words, she found a semiconductor company, cleaned it up, and sold it to high quality, deep-pocketed competitor. We'll be eager to see where Ms. King turns up next.

Across the analog semiconductor industry, there are several founder-CEOs who are not willing sellers, and are not maximizing shareholder value - that is a topic for a future article. However there are several, like Ms. King and Mr. DiNardo, who may be mercenary, but are certainly putting shareholder interests first.

We've seen this script too many times before. We think Mr. DiNardo will get more research coverage (he'll be at the Jefferies TMT Conference on May 8th), share his vision, and really get this stock going.

Despite Exar's historical mediocrity, with Mr. DiNardo at the helm, it's the early innings for Exar on an exciting ride.

Disclosure: I am long EXAR.

Additional disclosure: We conduct thorough research on our ideas, but our views are our own. Please do your own research.