Saturday, January 12, 2008

Wu Interview - UTs Strategic Alternative Study

On Jan 4, 2008, there was an interview with former UT founder and China CEO Ying Wu that discussed Wu leading an outside group purchasing the company for “double the price”. Here is the link provided by a fellow shareholder Johnheppy.

Further discussion on this topic from the yahoo message boards can be found here.

For some background, we go all the way back to May 10, 2006, the day UT announced that Lu was going to step down at the end of 2006 and hand reins to Ying Wu.

At that time, the share price of UT was $7.25-7.5. A quote at that time:
' I think Hong Lu lost credibility with investors a long time ago, and now it appears the board has lost faith too," writes Light Reading Insider analyst James Crawshaw in an email commenting on Lu's departure. "I am surprised he is staying as CEO until the end of the year. I guess this is to give the impression of a smooth handover to Ying Wu, but he is likely to be a bit of a lame duck."

On Oct. 11, 2006, UT announced it had hired Merrill Lynch to explore strategic options.

"Our Board of Directors and management team believe that the inherent
value of the company and its opportunities are not reflected in our current
share price," said Hong Lu, Chairman and Chief Executive Officer of
UTStarcom, Inc. "We believe the engagement of Merrill Lynch will help us to
carefully examine a range of short and long-term alternatives."

At that time, the price was at $9.74. The increase from earlier in the year boggled some analysts at the time as fundamentals did not improve significantly although we now know net cash increased to about $300m by end of 2006. In any case, news about the potential sale was the main reason it drove the price to the $10-11 range from the $6-7 range. Because the stock price had traded in the $30s-40s and there were even insider buying in the $14-15 range in late 2004 (that drove it to the low $20s), it was not ridiculous that the board/management felt it was undervalued at $7. After the news of the potential sale, analysts put a potential $15 take out price. In early Feb 2007, the price reached $10.32 as funds felt that the value could be unlocked as well.

Going back to Lu stepping down and the appointment of Wu to head the strategic alternative study, it seems that Wu not only wanted to take over as CEO but to radically change the strategic path of the company. Wu was in favor of focusing on the China operations which were more profitable and less on the international markets where UT did not have a good foothold. From the recent filings to the SEC of the last 5 quarters, UT continued and increased spending on international markets (specifically India) to capture broadband/iptv growth abroad. The continued spending has taken a toll in the balance sheet and caused serious strategic discrepancies with Wus vision. Wu, who is the largest shareholder, with over 4 million shares obviously did not want the continued spending and losses that has now resulted in a sub $3 stock price.

From the shareholder meeting and the poll conducted in this blog before it, the number one question on shareholder’s mind was what were the details of the strategic study. This was a question we asked to management. The response was that there were offers for parts of the company but none that made sense or they felt would close because of the financial environment at the time. Based on this recent interview, Wu could have made an offer for parts of the company but we don’t know for what parts and how the deal would have been structured. The money losing operations, high operating costs, and investigations at that time would not be conducive to just selling “parts” of the company, specially the profitable and attractive assets.

Management did not divulge what parts or how much was offered as you would expect. I then had a follow up question to Director Toy asking what price was the board/management looking at when it went in to explore strategic options. Obviously, their statement that the current share price at that time ($9.74) did not reflect the inherent value meant they were looking for closer to $12-15 or higher. To my fellow shareholders, I tried and prodded but could not get a target price. Toy avoided the question by saying they were looking at a combination of price/possibility of closing that made sense. Nevertheless, S&P at the time had $11 price targets based on their sum of the parts (and now down to $3.5, a discount to their existing sum of the parts).

I could continue with shareholder equity and does the stock deserve to trade at this price but you can read previous postings on that. I do think management/BOD has done such a poor job in running the company to the ground and mismanaging the strategic study/Wu situation that it does deserve a discount on the current assets (not to mention they are not yet profitable and have huge cash burns). Saying that, I have to be forward thinking and the existing shareholders have paid a dear price for the path management has taken which have yielded some significant wins in India, China, Brazil, Taiwan, Philippines, Chile, Pakistan, etc.

Nawar has outlined some good comments on why Wu did this interview (see link above) and UT could undergo further strategic studies/cost cuts if this current plan doesn’t pan out. However, management is definitely under the gun to produce and produce FAST. Management has not taken any salary cuts and have increased their bonuses and salary. Blackmore has come in as an outsider and seems to be doing a good job but the impact has not been reflected in the balance sheets yet. A new forecast of profitability by end of this year/early next year (with commitment to boot) and a sense of urgency supposedly drives this company now. Existing/long time holders have little good choices at this stage. There is still tremendous value and the potential for a buyout or turnaround are very possible. The Wu interview shows another dimension to hold shares or add at this price range. Wu sold PAS and generated billions of revenue/profits to the operators and to the company. He has emphasized iptv has resolved major hurdles and worldwide numbers, deregulation, pricing models, etc are proving the trend is a massive implementation with UT sure to capture the growth.

I would like to reiterate that Blackmore’s message of working under a sense of urgency is way too late and it should be working under “shame” at this stage. If these guys still cannot turn it around by the China Olympics year, they really have to just sell the company and turn it to some cavemen that can.

1 comment:

Anonymous said... I said it before (as a shareholder, who trusted these crooks words for years now): even you would do a much better job by far in running this company (...not against a wall with eyes wide open). fraud barton, hong lie, tom fed up -sad to say, but anyway!