Starboard takes advantage of high-price Mellanox to sell

Eyal Waldman Photo: PR

Starboard spent $250 million on buying nearly 11% of the Israeli big-data chip company and having sold shares for $116 million still has a holding worth $318 million.

The good financial results reported by Israeli technology company Mellanox Technologies Ltd. (Nasdaq:MLNX), but mainly the market's expectation that that company will be sold at a high premium, has propelled the company's share price to over $100 last week for the first time since 2012.

Taking advantage of the higher share price was New York-based activist investment fund Starboard, which sold shares in Mellanox for $116 million in recent weeks at share prices ranging from $86 to $101. The fund's holding in Mellanox is now 5.9%, with a current value of $318 million.

If and when Mellanox is sold at a premium on the market price, Starboard's holdings will be worth even more. Even now, however, it is clear that the fund has reason to be very satisfied with its investment in Mellanox shares. The US fund invested in Mellanox in October-November 2017, when it spent $250 million on buying nearly 11% of the Yokne'am-based company's shares at prices ranging from $44 to $51.

In the ensuing months, Starboard conducted a campaign against Mellanox's management, alleging that the company was undervalued because of its low operating profit. Starboard demanded the replacement of Mellanox's entire board of directors and the setting of future profit targets. Shortly afterwards, the fund sold a small part of its holdings in Mellanox for $37 million when the share was traded at $85 million. It is now selling off another part of its holdings at higher prices.

Enhancing value and exiting the investment at a profit in a short time

Activist funds are investment funds that try to affect the management of the companies in which they have invested in order to generate value and eventually sell off the investment at a good profit. The fund usually buys shares on the open market. When it reaches a certain level of holding, it announces it. At this point, it makes demands that can includes almost anything, including dividends, the sale of assets, an attempt to sell the company, opposition to certain measures advocated by management, and so forth.

Such funds sometimes single out individuals in a company's management or on its board of directors and demand that they leave the company. An investment by an activist fund sometimes leads to a proxy war. In many cases, these conflicts are enough to generate value and increase the company's share price, because the shareholders believe that the fund has spotted potential, or that the company's management will adopt preventative measures by taking steps in increase the company's value. In many cases, an activist fund is not aiming at a long-term investment; its objective is to attain value for itself and exit from the investment at a profit within a short time.

In the case of Mellanox, it appears that the fund operated by the book and obtained its objectives. In another case, on the other hand, the results were less positive. Before its investment in Mellanox, Starboard invested in the shares of dual-listed company Perrigo Company (NYSE:PRGO; TASE:PRGO), buying 4.6% of Perrigo's shares, and later increasing its holdings, so that it held 10 million shares, over 7% of Perrigo's share capital, with a current value of $492 million, at the end of 2018.

In last 2017, Starboard CEO Jeffrey Smith said that Perrigo was "his best investment idea," but the situation was apparently a little more complicated. On the one hand, Starboard succeeded in bringing changes to the company's board of directors, with the appointment of three of its representatives to the board in 2017, in addition to two more board members whom it recommended, out of 11 board members, despite the fact that Starboard owned fewer than 10% of Perrigo's shares. Furthermore, as the fund demanded from the beginning, Perrigo decided to exit the prescription drug sector, announcing several months ago its intention of splitting off or selling the company's prescription drug business. No deal has been reported yet, however.

On the other hand, Starboard acquired Perrigo's shares at prices ranging from $77 to $96, much higher s than the current market price. In late 2018, Perrigo's share price plummeted to below $40, following a tax bill received from the Irish authorities, which added to the negative sentiment concerning the share created by instability in Perrigo's management and poor financial results in recent years. It is possible that Perrigo could recover and increase in value, thereby benefiting Starboard, but at this stage, at least, Starboard has lost money on paper on this investment.

Published by Globes, Israel business news - en.globes.co.il - on February 17, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Eyal Waldman Photo: PR
Eyal Waldman Photo: PR
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