Lordrobot (89.90)

KLIC shares in search of a hostile takover

January 04, 2010 – Comments (4) | RELATED TICKERS: KLIC , AMD , MSFT

What does MSFT have in Common with KLIC?

Essentially two companies with 90% market shares and management that looks like Teldar Paper. Fortunately, KLIC’s CEO will be leaving.

In a nutshell KLIC is a company that supplies wire bonding machines to the semiconductor companies of the world. It was founded in the 50s by Fred Kulicke and Al Soffa and it grew to have roughly 100% of the market share. Fred was a very dynamic guy. He had two sons, Fred Jr. who was killed in Vietnam and was the heir apparent to run the business. Instead the job fell to Scott Kulicke, Fred’s other son. Unfortunately nepotism isn’t always the best solution and Scott essentially became a placeholder but never generated any shareholder returns of any significance.

In Nov of 2009, Fred died at 91. He was truly a remarkable guy. Shortly thereafter, Scott announced his retirement. It has been expected and for many shareholder overdue and highly welcomed news. You just don’t want a place holder when the whole semiconductor market is roaring into Asia.

What is so bad about Scott’s management? He has made some big and costly mistakes. Understand that Scott is impeccably honest, he has a fine education, but nobody has ever sensed that his heart was in the business. Fred strayed from the family and Scott was his mother’s son. So the lively renaissance bon vie vant Fred was replaced by Scott the uninspired placeholder. On could almost sense the burden but nobody suffered more than the shareholders as K&S lumbered slowing into the semiconductor explosion of the 80s and 90s timidly.

Several years ago the company decided to get into the gold wire business to supply customers with gold wire. This turned out to be a fiasco. As gold went higher, Scott refused to protect Shareholder and Customers by investing in Gold futures to shield customers from the price of soaring gold. Instead, the company started carrying the charges and it demolished the cash flow and caused earnings to tank. Fortunately the company found a partial solution by moving to copper wire and selling adaptors to owners of KLIC wire bonding hardware. Again Cu went sky high and the company’s margins suffered. Finally KLIC virtually gave away the wire business to a firm with commodity trading experience. KLIC ventured into Europe which proved problematic instead of focusing on Asia. Management is under near dictatorial control so it has sprouted roots. Placeholders grow moss not businesses.

Another hallmark of Scott Kulicke reign is a board of directors that owns very few shares of stock; just a couple percent. This is like a scene out of the movie “Wall Street” when Michael Douglas speaks at he Teldar Paper Shareholder’s meeting. This year Scott Kulicke filed with the SEC to mark his intent to sell 600K shares to diversify. But this is hardly diversification since it amount to divestment of essentially all his shares. So the company is run by people with no stake in the company. It is one big retirement party.

Due to the slowdown and gold wire fiasco, KLIC earnings went negative, so this year as growth is following the semiconductor cycle, KLIC increased the float with a badly priced secondary, another blunder, then promptly started paying salary bonuses for past services rendered since KLIC had a salary freeze. Thus these funds were used for compensation rather than growing the company while Asia is on fire.

After a while, one gets the idea that KLIC was being run like some kind of mom and pop shop with no regard for the shareholder value whatsoever. In the last year, the CFO left for greener pastures and the new CFO somehow overpaid last quarters taxes by 750K. This is absurd.

Scott meanwhile is liquidating shares into a light float planning to hang on until 2011 so the board of directors of “Teldar Paper” can pick a successor. This is a nightmare. Meanwhile Scott reassures shareholders that it will be business as usual until then. That is exactly what we don’t want to hear.

KLIC is a perfect target for a hostile takeover. It has a light float, is grossly undervalued. It has a CEO that is R.I.P. [Retired In Place], a board with no stake in the company, and a 90% market share in the wire bonding market share inherited from the founders. In a nutshell this is a stifled gem.

With this leisurely retirement KLIC is standing still and will not be growing the business. The board is disinterested in the shareholders; again they have no stake. New technologies in the bonding markets are going unnoticed at KLIC because of the retirement.

They have other products in the stream but can’t seem to leverage through the channel. They have stud bumpers, grinders and dicers but who would know it.  I don’t even think they have a PR department. I can hardly wait to see who the “Teldar Board” selects as the next CEO [sarcasm noted]. 

KLIC is the ideal hostile take over. The company has good technology and a management and board that simply has their collective heads in the sand. Nepotism simply doesn’t work. I say KLIC gets a hostile takeover within six months.