Zarlink shareholders quiet on competitor

Executives at Zarlink Semiconductor Inc. are actively looking for other buyers after shrugging off a competitor’s offer to buy the Ottawa chipset design company.

“We’re organizing our own strategy with our bankers to go out and see what interest there is out there,” chairman Adam Chowaniec (pictured) told shareholders Wednesday at the firm’s annual meeting.

He didn’t give any indication of what he’s heard, other than to say there have been “many inbound calls.”

However, he did emphasize that last week’s proposal from Irvine, Calif.-based Microsemi Corp. to buy all of Zarlink’s outstanding shares for $3.55 each for a total of US$445 million was “an expression of interest” and not an official offer. He rejected a suggestion from one shareholder that it was a “done deal.”

In fact, Zarlink [TSX: ZL] refused to put the Microsemi proposal to shareholders as the U.S. company urged. No shareholder stood up and asked for it, leaving the impression stock holders are at the moment satisfied with management’s strategy for answering Microsemi.

After the board rejected a letter from Microsemi with the proposal, saying it undervalued the company, Zarlink hired financial advisors to help it conduct a strategic review to enhance shareholder value.

That review, Chowaniec cautioned, “my not necessarily result in a transaction.”

In a conference call before the shareholder’s meeting company CEO Gary Tanner said Microsemi has been invited to participate in the review, which he said will be “open and transparent.”

He gave no timetable for the process, but added that “we certainly have nothing to gain from delaying the process.”

“We firmly believe we can generate a lot more value than the offer on the table,” he said.

On Wednesday morning, after Zarlink released its first quarter results, its stock was at $3.66, 11 cents higher than the Microsemi offer. However, that was also down 11 cents from its peak last week.

At press time no one at Microsemi could be reached to comment on the Zarlink moves.

Zarlink is a fables semiconductor firm which outsources the fabrication of its designs to other electronics manufacturers. Its chips are used in wireless and wireline routers, base stations, radio network controllers and aggregation transmission equipment from some of the biggest telecommunications equipment makers including Alcatel-Lucent, Nokia Siemens Networks, LM Ericsson [Nasdaq: ERIC], Huawei Technologies Co. Its other major line of business is chipsets for implantable wireless medical devices.

To shareholders Chowaniec and Tanner painted a bright picture of the company, which one institutional shareholder said “was looking pretty bleak a few years ago.”

Zarlink has since turned away from legacy chips and more towards timing chipsets for wireless equipment, for gateways used to extend fibre optic telecom networks to residences and for medical wireless gear.

Among the potential uses for the medical wireless technology are deep brain stimulation and the treatment of diseases like Parkinson’s epilepsy and diabetes, Tanner told shareholders. Such products, developed by others, have a long lead time, he cautioned, but once on the market their revenues “are like an annuity” that, if successful, can go on for as long as 10 years.

Revenues from the wireless timing products were up 39 per cent and wireline circuit revenue (which includes the gateway products) up 34 per cent for the fiscal year that ended March 25, Chowaniec told shareholders, while revenue from the medical wireless products is starting to grow. Total revenue was up 13 per cent to US$230 million for the fiscal year.

“Overall this is a picture of a healthy company,” he said.

That’s one reason why Microsemi wants it.

However, Zarlink’s first quarter numbers released earlier Wednesday showed net income had dropped to US$2.3 million from US$16.9 million from the previous quarter and US$10.2 million from the same period a year ago. (Zarlink reports in US dollars.). Revenue was up slightly to US$55.4 million compared to $54.8 million in the fourth quarter.

Looking into the second quarter, Tanner cautioned there “headwinds” because of equipment supply problems due to the earthquake in Japan. But he expects strong growth later in the year.

American wireless carriers, he said, are “spending aggressively” to expand their wireless networks.