That's it. Another listed Israeli high-tech company is swept up by a larger US company, this time after a short time as a public company - two years and four months. PowerDsine (Nasdaq: PDSN) is being sold to Microsemi (MSCC) in a cash and shares deal that, at current prices before today's trading on Wall Street is estimated to be worth $245 million ($11 per share), $0.50 less than the IPO price in June 2004.
As in the case of M-Systems Flash Disk Pioneers (Nasdaq: FLSH), the sweeping up and banking work was done by Citigroup, which also managed PowerDsine's IPO two years ago.
Microsemi is a chip company from the West coast of the US traded at a market cap of $1.1 billion. Only a month ago it was worth $2 billion, but its share price collapsed because of a severe profit warning. Microsemi, an analog chip producer, mainly deals in chips for management and control of energy consumption, which presumably is what brought it to PowerDsine, which specializes in power over Ethernet in local area networks, a niche that has become hotter recently, but is apparently not big enough to maintain PowerDsine as an independent company.
When co-founder and CEO Igal Rotem and co-founder and president Ilan Atias floated the company two years ago at a share price of $11.50, I'm sure their dream was not an exit at $11. We are not talking about an IPO in the bubble era at inflated prices, but rather the opposite: one of the first IPOs in the hesitant period following the gradual recovery from the great market crash.
PowerDsine has reached the end of the road as an independent and public company for several reasons. First of all, its niche, power over Ethernet, is too small to support a large independent company. Moreover, this niche is problematic, because it has one very large customer, namely Cisco Systems (CSCO), which at the moment actually buys from a competitor to PowerDsine, Linear Technology (LLTC). In the market left to PowerDsine beyond Cisco the company has not managed to establish the kind of growth and profitability a technology company needs to make Wall Street fall in love with it, and so since the beginning of 2005 and until today, the share has been traded below the IPO price.
Besides the problem of a market in which there is one big customer and a few small ones, PowerDsine changed its business model when it decided to turn from a company selling communications boxes built around chips it designed with great success to a company mainly selling the chipsets themselves. That is, it became a fables company in every respect.
The change in business model did not go smoothly, and there were profit warnings along the way that alienated investors even more. In addition, the company told the capital market too early, more than eighteen months ago, that Cisco would soon become a customer, while Cisco was on no hurry. Investors gradually deserted, and even though PowerDsine did manage to sell to Cisco subsidiary Linksys, this was not the large market that PowerDsine had indicated to the frustrated investors.
Another factor that apparently pushed the founders towards the sale door is the make up of the company's ownership. PowerDsine went into its IPO with one very big institutional investor, General Atlantic, which has a huge stake of 4.7 million shares. This investor stood no chance of exiting its position through normal trading. The average daily volume of trading in the stock is just 100,000 shares, and even this was only in the past few months, when the whole market knew the company was up for sale. One can assume that this large investor pressured the founders to sell the company and extricate it from its massive investment.
Published by Globes [online], Israel business news - www.globes.co.il - on October 24, 2006
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