Asyst is an automation company whose products are sold to manufacturers of both semiconductors and flat panel displays. Asyst's products sort, handle, transport and track silicon wafers during the production process.
The company's products are designed to minimize imperfections in the manufacturing process. For example, people used to walk wafers from bay to bay in the semiconductor fabrication plant. However, as processes became more complex and wafers more expensive, chip companies sought to decrease the probability of error and automated the transport of each wafer around the fab.
I bought the company a few years ago as part of a basket of half a dozen chip, and chip equipment companies that had become dirt cheap.
Semiconductor stocks have generally followed a somewhat consistent cyclical pattern. At the bottom of the cycle, they are cheap relative to sales/book value/cash flow/asset value/normalized earnings, etc. When inventories have cleared out and demand begins to pick up, ordering accelerates, and sales and earnings shoot up. Stock prices lead this cycle in anticipation of a bottom. At the top of the cycle, double ordering occurs, inventories build, stocks are expensive, and inevitably, business slows considerably. Again, the stocks anticipate the top and turn over before the business tops out.
With a few exceptions, the semiconductor industry is maturing. Thus, the cycles are becoming more muted as the frantic boom/bust cycles dissipate. In my opinion, that's too bad, because one could make (and lose) considerable sums of money playing the cycle.
My strategy for trading the group has been to identify prior low and high valuations during the cycles, making an approximation of where I think the stocks could hit this cycle, allocating a set percentage of capital to the trade, then buying and selling based on my specific price targets. I like to buy a basket of companies because, frankly, I'm not exactly the world's sharpest technology whiz, and spreading my capital around mitigates specific company risk.
So it was with Asyst when I bought it a few years back as part of a basket of chip companies. I dumped the other five at a profit but miscalculated the top for Asyst and rode it back down. Had I not already owned the stock, I would have bought it below $3, where it was until last week.
On Monday, it closed at $4.14, up from $2.50 a few days ago. The company has caught a bid, with the venture capital firm Menlo Ventures, the private equity firm Gores Group LLC, and an automation company run by Asyst's former CEO, Aquest, offering to take the company private for $5 to $6 per share. The company has rejected the offer.
The reason why I described Asyst as third-rate is because the company has not been properly managed. Execution has always been a problem. Asyst recently entered the flat-panel display business which is fiercely competitive, ridden with irrational competitors competing for market share at the expense of profit. There is little organic growth in its core markets.
Historically, its financial results have not been pretty. The company has recorded a GAAP loss six of the previous seven years, with 2007 being the only year to show a profit since The Bubble collapsed. This year the company is likely to revert back to showing a loss before the company sees black in 2009.
Given its recent history, one might expect an investor to jump at the chance to sell out at double or more the price of just a few days ago. However, the semiconductor equipment industry is approaching the trough of its cycle, and valuations are falling. Up until a few days ago, Asyst was sitting at rock-bottom multiples. Thus, it is not surprising that the former founder, backed by private money, would take a run at the company.
I think the company is right to reject the offer as too being low, and if given the chance, I will vote against it. I think the company is worth more, and would not tender my shares at the offered price for the following reasons:
The company trades at 0.4x sales. The stock traded above 1.0x sales six quarters ago. I'd take 0.8x sales. Estimates ex-stock compensation for FY'09 are around $0.50. The offering consortium values the company 10x-12x FY'09 earnings. (The fiscal year begins in April.) The company is not profitable, but a good operator should be able to increase margins, and Gores claims to be a good operator. The firm is established in 300 mm fabs around the world. The new operators can sell the old Shinko business. There may be an opportunity in solar. Since the bottom of the market on October 10, 2002, there have been 1352 trading days. Asyst has traded above $5 per share on 973 days, or 72% of the time. The stock has traded above $6 per share on 788 days, or 58% of the time. The stock was $7 just a few months ago.
I think the guys making the bid are smart, and I think they believe that Asyst is worth more. Therefore, I'm holding out.
I also believe the bid is a signal that the bottom in semiconductor and equipment stocks is near. I have compiled a list, and expect to start buying if the stocks continue to fall.