One spike just wasn’t enough. Shares of GSI Technology, Inc. (NASDAQ:GSIT) spiked early yesterday morning following the news that GigOptix Inc (NYSEMKT:GIG) had renewed its pursuit of the company, offering to purchase it for $6.50 per share. This morning those shares have performed an encore, spiking again following a 13D filing by Eric Singer’s activist fund Vertex Capital Advisors, which puts pressure on GSI Technology to accept what the fund believes to be an attractive offer considering GSI’s lengthy history of underperformance and undesirable market position. Vertex Capital Advisors owns 2.35 million shares of GSI Technology, a 9.9% stake in the company, with the fund invested at a cost basis of about $5 per share.
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New York-based activist hedge fund Vertex Capital Advisors was founded by portfolio manager Eric Singer in 2014. Singer previously managed activist campaigns while with Potomac Capital Management, with a focus on hardware-based technology companies. His successes include winning a board seat at PLX Technology, Inc. (NASDAQ:PLXT) in December 2013 and facilitating a sale of that company, in which Potomac was the largest shareholder, to Avago Technologies Ltd (NASDAQ:AVGO) for $309 million in 2014. Unsurprisingly, he has shown activist interest in companies in which Potomac is still invested as well, including Axcelis Technologies Inc (NASDAQ:ACLS), with whom Singer reached an agreement in March to have two independent directors added to that company’s board.
Singer’s involvement with GSI Technology, Inc. (NASDAQ:GSIT) began in January when he first disclosed the 9.9% position that he holds today. In the middle of March he nominated four directors, including himself, for the company’s board following GSI adding two new directors to increase its board composition to seven members. Those additions were seen as a way for the entrenched board to further insulate its position against Singer’s activist involvement.
GigOptix Inc (NYSEMKT:GIG)’s own involvement stretches back to August 18 of last year when it made an identical $6.50 per share offer to purchase all of the outstanding common shares of GSI Technology, Inc. (NASDAQ:GSIT). Rather than engage with GigOptix on any level, GSI refused the offer, which was eventually withdrawn in November. Not only that, GSI’s board then proceeded to structure a more than $2 million management compensation plan for the company’s executives in the event it was acquired and they lost their jobs.
Singer in his 13D filing today expresses that the sale is a necessary one for the struggling company, which is the smallest player in an industry that has undergone considerable consolidation (say that five times fast) over the past few years. GSI Technology’s revenue has consistently declined over the past five years, dipping to just $53.5 million in fiscal year 2015, which ended on March 31. That represents a more than 45% decline from fiscal year 2011 and shares have followed suit, declining by 11% over the past five years even when factoring in the 10% spike in shares over the past two days, which will dissipate should the offer go unaccepted again. One of the lone bright spots for the company during fiscal year 2015 was its improved gross margins, which came in at 47% compared to 44.6% one year ago, which Chairman and Chief Executive Officer Lee-Lean Shu attributed to higher-margin products. Nonetheless, GSI reported a net loss of $5 million or $0.20 per diluted share for the year.
The current offer from GigOptix offers a similar premium on the company’s stock at the time the offer was announced as the initial offer did, 26%, versus what would have been a 32% premium the first time the offer was made. It also leaves 17% remaining upside from the current share price. However, while the involvement of Vertex Capital Advisors is clearly giving hope to investors as evidenced by its second spike this morning, given the previous actions of the board and the upper hand it would have in the event of a proxy fight, with management having a 20% ownership position, it’s hard to see Vertex Capital Advisors and Eric Singer as having enough leverage in this situation to fully flex their muscles. As such, despite the upside potential, investors should approach this developing situation with caution.