Saturday, February 23, 2008

Rethinking UTs strategy going forward

As we prepare to meet with management in March, one of the major issues that will be discussed is the overall strategy and strategic options the company has and will try to implement. It has been mentioned that UTs unique situation of being a US company with China manufacturing and roots give it a great advantage. However, as we've seen, the problems and disadvantages outweigh the benefits the last few years. As a long time shareholder that is very much vested in the company, I am constantly rethinking their options and strategy going forward. The management and the board of directors have worked on expanding the business away from PAS roots and dependence on the China market. This venture has been costly and has plunged the shareprice from the $30-40 range to sub $3. Lets look back at some of the strategic steps the management has taken in the past few years.

UT acquired select assets of 3coms' commworks business for $100m (an amount that is equivalent to UTs enterprise value on some trading days).

I encourage people to read the article and all the nuisances in it - interesting to read the old articles and the thoughts behind the purchase such as...

"CommWorks is the worldwide market leader in Code Division Multiple Access (CDMA) 2000 Packet Data Serving Nodes (PDSN); and has deployed softswitches, media gateways, remote access servers (RAS), and applications around the world."

That acquisition has no doubt brought technologies that led to some revenue and customer contacts but have probably also led to MORE spending and expenses in WCDMA, PCD, IPTV as UT went on to try to develop a full suite of products in the wireless, broadmand, multimedia and fix line (and FMC) space.

"The financial rationale for purchasing CommWorks' assets is compelling. "One of our strategic goals is to increase our global sales and support infrastructure," continued Lu. "Integrating CommWorks into our organization will diversify our sources of revenue, increasing our pro forma non-China revenues from approximately 25 percent to approximately 30 to 35 percent in calendar year 2003. Moreover we believe CommWorks' large customer support and professional services organization, which represents between 40 and 50 percent of its total sales, provides an excellent source of recurring and stable revenue." "

The resulting company has more replicated the New York Knick basketball team, a collection of overpriced talent (technology analogy) with very poor results (no profits-heavy losses-literally on both accounts). As you can see, for the last 5 years and probably earlier, the company has tried to increase their footprint in terms of technology, products, markets, etc at the expense of deteriorating financials and collapse in shareprice.

The company went into a strategic alternative study in 2006 but their collection of assets/businesses have not produced consistent growing profits and stable markets. They had issues with the options investigations, filings, and China investigations (which we didn't even know about). It was not surprising that buyers were hesitant in tendering an offer for the entire company. Also, it goes back to their "unique" situation being a US company with deep Chinese roots. Should they list in China, sell to a Chinese competitor or sell to a "foreign" company (outside of China).

On the news the past week or so is the sale of 3com to Bain Capital Partner and Huawei for $2.2 billion. Was it rejected because of Huawei's China military/political ties or was it because the price offered was simply too high in this environment. I would think its buyers remorse since the stock has fallen to $1.2 billion.

As mentioned previously, we would like to stick to Plan A to turn the company around but we need to discuss Plan B with management as I believe they are open to selling out as well (with their recent golden parachutes in place). I believe the company was "hoping" for $12-15/share range last year as the stock already hit $11. With a full turnaround, the company may be able to achieve that on their own but the question is WHEN? Also, the competition will only get worse so consolidation is inevitable for UT and their size. Aside from the multiple acquisitions, the company has spent hundreds of millions in R&D year after year for the last ? years.

My personal preference is a Cisco acquisition only because I'd rather get Cisco stock than other company stock. An acquisition by PE may happen but they would turn around and break the pieces because its worth more than the complete company right now. A Chinese acquisition will not have as tough a hurdle to overcome but there is a question to whether the Chinese would deal with UT at this stage base on their battles the last few years and the shareholder makeup of the Chineses companies (had some discussions with Charlie Yang on this although he has not been in touch with ZTE for a while). Cisco on the other hand is on a never ending acquisition spree for technology and markets in the emerging countries (BRIC anyone). Cisco is interested like everyone with IP and IPTV. They are going into the consumer space, local base stations, broadband (obviously), and are spending money on R&D in India ($2billion committement? etc). They are headquartered within driving distance and would not have regulatory hurdles. I would not have a problem with getting Cisco currency rather than cash as I think the stock would actually move up with the acquisition (on the cost savings on their own R&D, acquiring tech/markets on the cheap). So, a 1 UT share to .6 Cisco share may do it :-)

Another neverending news is Motorola's goal of enhancing shaerholder value by dealing with its own handset division (see Friday's WSJ). Icahn has taken a 5 percent position in Moto and want them to sell the division for around 1x revenue or $19B. The problem is Moto's handset division lost $1.2 billion. ZTE was quoted as being interested but now may have some issues as well with regulatory approval, not to mention the steep price. I wanted to bring this up because Moto hired a CFO recently,Paul Liska. This guy worked at several PE firms and worked at Sears as finance chief which sold their credit card division to Citigroup. We need the company to show tangible evidence of constantly looking at strategic options to unleash the value. Someone with experience in finance and the techs pace and their sole purpose is to look at strategic options and is accountable to shareholders.

Anyway, back to the shareholder meeting. I have sent an email to the shareholders and will need to do further planning to prepare for the meeting.

1 comment:

Anonymous said...

Two comments. Sorry to burst your bubble, but there is a slim chance that Cisco is interested in UTSI (definitely not while UTSI is in the handheld business) and virtually no chance that Cisco pays stock for this company. There's even a smaller chance that Cisco's stock goes up for acquiring UTSI. It's nice to dream though :-)