According to a new 13D filing with the U.S. Securities and Exchange Commission, Jonathan Lennon’s Pleasant Lake Partners disclosed owning 3.42 million shares of MagnaChip Semiconductor Corporation (NYSE:MX), representing 9.9% of the company’s common stock. Hence, this marks an increase of 189,230 shares since the fund disclosed its position in its latest 13F filing, continuing a trend of the hedge fund gradually boosting its stake in the company. However, this relatively minor uplift is not the most important revelation of the filing, as Pleasant Lake Partners also disclosed sending a letter to MagnaChip proposing to acquire all of the outstanding common stock of the company, at a price of $10.00 per share.
Pleasant Lake Partners is an activist hedge fund co-established by Jonathan Lennon in 2012. The New York-based investment firm employs a concentrated approach to investing in global stocks by focusing on consumer, industrial/natural resources, and media companies. Jonathan Lennon had previously worked as a general stock analyst at JAT for three-and-a-half years and as an investment banking analyst at Goldman Sachs prior to establishing his own firm. The 13F filing for the June quarter reveals that Pleasant Lake Partners manages a public equity portfolio worth $118.95 million.
Following activist funds like Pleasant Lake Partners 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 Pleasant Lake Partners 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 36 months since our small-cap strategy was launched it has returned 118% and beaten the S&P 500 ETF (SPY) by more than 60 percentage points (read more details).
To begin with, MagnaChip Semiconductor Corporation (NYSE:MX) is a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products. The shares of MagnaChip are down by nearly 37% year-to-date, mainly impacted by negative sentiment, business and accounting problems, and geographic complexity. However, the stock has gained over 7% during today’s trading session following the announcement of Pleasant Lake Partners’ intentions to buy the chipmaker. In the meantime, Marc Lasry’s Avenue Capital is among the largest shareholders of MagnaChip, owning nearly 4.09 million shares.
Let’s now go back to the recently-released letter sent by Pleasant Lake Partners to MagnaChip. The activist hedge fund asked the company’s Board of Directors to remove its poison pill strategy, which is generally considered as one of the most effective defense tactics available to publicly-traded corporations. Earlier this year, MagnaChip adopted a shareholder rights plan that was intended “to reduce the likelihood that any person or group would gain control of the company through open market accumulation”. As already mentioned, Pleasant Lake Partners offered to buy all of the shares of MagnaChip, saying that a potential sale of the company would represent the best way to maximize value for its shareholders. The $10-a-share offer represented a 29% premium from the closing price on Friday. The hedge fund believes that MagnaChip would be worth considerably more to some strategic acquirers than as a standalone company. The differential between the recently-made offer and the current price narrowed during today’s trading session, but left a large gap that reflects the uncertainty surrounding the deal.