Glenn W. Welling’s Engaged Capital has disclosed a new position in MagnaChip Semiconductor Corporation (NYSE:MX), revealing a 7.3% ownership stake in the company consisting of nearly 2.52 million shares, via a 13D filing with the Securities and Exchange Commission. Yet again, this represents a new holding for Engaged Capital, as it did not disclose any ownership of MagnaChip in its most recent 13F filing.
Engaged Capital LLC is an activist hedge fund launched by Glenn William Welling in 2012. He was backed up by a group of professionals with exceptional experience in activist investing in North America, while the seed capital for his fund was granted by Grosvenor Capital Management, which is among the oldest and largest global alternative investment managers. Engaged Capital specializes in small and mid-cap North American companies and aims to create long-term shareholder value by bringing its team’s perspective to the management and boards of the companies it invests in. The investment management firm categorizes itself as a constructive activist firm (constructivist?) with a focus on delivering superior, long-term returns for investors without engaging in public fights with the companies’ management and boards, which often results in the airing of dirty launder and makes none look the better for it. Glenn Welling, the founder and Chief Investment Officer of Engaged Capital, had acted as a Principal and Managing Director at Ralph Whitworth‘s Relational Investors, which is an activist equity fund, prior to launching his own fund. Even before that, he worked as a Managing Director at Credit Suisse as the Head of the Investment Banking Department’s Advisory Business for almost seven years. According to the fund’s most recent 13F filing, Glenn Welling and his team of professionals manage a public equity portfolio worth $133.95 million.
Following activist funds like Engaged Capital is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. A fund like Engaged Capital can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activists’ hedge funds has been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 34 months since our small-cap strategy was launched it has returned over 132% and beaten the S&P 500 ETF (SPY) by more than 66 percentage points (read more details).
MagnaChip Semiconductor Corporation (NYSE:MX), based in South Korea, designs and produces analog and mixed-signal semiconductors. The company’s business operations are divided into three main segments: Display Solutions, Power Solutions, and Semiconductor Manufacturing Services. The first segment mentioned produces semiconductors used in flat panel and mobile displays. The Power Solutions’ integrated and discrete circuits are used to manage the power usage for electrical devices. Whereas, the Semiconductor Manufacturing Services segment produces analog and mixed signal semiconductors used in computing and wireless markets. The shares of MagnaChip have dropped by over 34% year-to-date, owing to a substantial slump at the beginning of February. In the following article we will attempt to shed some light on why the stock plummeted so much in February, as well as what others are trying to do about it.
We’ll start out by providing a short summary on why the shares of MagnaChip suffered a massive slump at the beginning of February. Between February 1, 2012 and February 12, 2015 MagnaChip allegedly failed to disclose the fact that the company was wrongly recognizing its revenues, which inflated its prior financial statements in 2011, 2012, and the first nine months of 2013. Therefore, the shares of MagnaChip traded at a supposedly inflated price over this period of time. However, on February 12 MagnaChip revealed its restated financial results for fiscal years 2011 and 2012, and for the first three quarters of 2013 through its Annual Report on Form 10-K with the SEC. As a result, the stock price plummeted from $15 per share to as low as $4.89 per share in a very short period of time. Nevertheless, the activist hedge fund Pleasant Lake Partners, managed by Jonathan Lennon, believes that MagnaChip is significantly undervalued relative to its normalized earnings power and asset value. Pleasant Lake Partners has sent a letter to MagnaChip asking for actions and necessary steps to maximize shareholder value (read more details), and it seems that MagnaChip has finally taken some steps to put the company back on track.
On July 9, after reviewing its governance structure and discussing with shareholders, MagnaChip determined to take necessary actions to eliminate the classified board effective by the 2016 annual meeting. The company’s three-class board structure has been previously elected for staggered three-year terms. However, all directors of the company will stand for election annually, for one-year terms starting from next year. This announcement likely came as a result of Pleasant Lake Partners’ call for major changes in its open letter, which may have also prompted Engaged Capital’s entry into the stock. In addition to that, MagnaChip has recently disclosed that its board formed a strategic review committee that is set to review, consider, and evaluate strategic alternatives for the company, including the sale of the entire company or a substantial part of it. Considering the ongoing M&A wave of activity among chipmakers, it is highly probable that the share price of MagnaChip will spike as soon as discussions on a potential deal reach the public’s ears. Within our database, Marc Lasry’s Avenue Capital represents the largest shareholder in MagnaChip Semiconductor Corporation (NYSE:MX) as of March 31, with 4.09 million shares.