OTTAWA, July 2 /CNW/ - Shareholders of Zarlink Semiconductor Inc.
announced today that they have asked the Company's Board of Directors to
immediately replace Zarlink's President and Chief Executive Kirk Mandy and to
nominate five new directors for election to the Company's Board at the Annual
and Special Meeting scheduled for July 23, 2008.
The shareholders are Scott Leckie, who manages funds owning 5.2% of
Zarlink's shares, the second-largest holding in the Company, as well as David
Banks and Daniel Owen.
In a June 30, 2008 letter to the Board of Zarlink, these Concerned
Shareholders called for urgent action to reverse the long-term erosion in
shareholder value and asked the Board to agree to a meeting by July 2 to
discuss their proposal to correct Zarlink's course. Dr. Henry Simon, Chairman
of the Board of Directors refused the meeting request.
"The current Zarlink Board appears to be unwilling to recognize that
change is overdue, although the share price is down by about 95% since
January 2002 and more than 60% since February 2005 when Kirk Mandy took over
as CEO for the second time," said shareholder David Banks. "The Board of
Zarlink has a history of rebuffing or ignoring the concerns of its
shareholders while it continues to oversee the mismanagement of the Company.
They have exhausted our patience. Their time is up."
The Concerned Shareholders note:
- Loss of share value: $1000 invested in Zarlink shares six years ago
is now worth less than $50, a performance far worse than both the
Company's closest peers and the average of semiconductor companies in
the Philadelphia Semiconductor Index (SOX) over the same period.
- Poor financial performance: Zarlink's accumulated net losses from
continuing operations since 1999 now totals almost $500 million.
Shareholders' equity was approximately $386 million then but has
declined to about $99 million today. The Company's net cash position
has fallen from more than $150 million to a current deficit of about
- Weak product portfolio and sales: Zarlink's product portfolio appears
to misaligned with the marketplace and is not contributing to revenue
growth; instead, revenues have declined for seven consecutive years,
- Unacceptable costs: The current Board and CEO are allowing costs for
overhead and research and development, as a percentage of revenues,
to continue at more than twice the average of similar companies in
the SOX Index.
- Poor acquisition track record: More than $600 million spent on
acquisitions in recent years has substantially undermined shareholder
value. Last year, for example, Zarlink acquired Legerity Holdings
Inc. for $137 million, which is significantly more than the entire
market capitalization of Zarlink today.
(All dollar amounts are in U.S. currency, which Zarlink uses for
In their letter, the Concerned Shareholders asked the Board to support
the election of five new, independent directors with proven industry,
management and turnaround experience. They also recommended that three current
directors remain on the Board. They advised the Board that they were fully
prepared to take their proposal to the remaining shareholders through a proxy
contest to replace the majority of the Board, but have not yet taken the final
step of filing a concerned shareholder proxy circular in the hope that the
current Board would take the necessary actions voluntarily.
The text of the Concerned Shareholders letter to the Board is below:
Concerned Shareholders of Zarlink Semiconductor Inc.
The Board of Directors
Zarlink Semiconductor Incorporated
400 March Road
K2K 3H4 June 30, 2008
As you know, for several years, I have managed funds that now own or
control 5.2% of Zarlink's outstanding shares. Like other investors in the
Company, I have been profoundly disappointed by the dismal performance of
Zarlink's shares and by the failure of the Company's leadership to achieve
tangible value creation.
The current CEO, Kirk Mandy, has had effectively 10 years to make Zarlink
a success but instead has produced a falling share price, poor financial
performance, ineffective management, and a strategy that has positioned the
Company poorly for the fierce competition and economic conditions it faces.
Rather than improving, Zarlink's strategic options are diminishing.
The misguided actions - and inaction - of Mr. Mandy have not been
corrected by the Board of Directors, as currently constituted, resulting in
Zarlink's failure to deliver value for the shareholders.
This failure cannot be allowed to continue. On behalf of the Concerned
Shareholders of Zarlink, I urge you to consider and support our proposal for
immediate change in leadership. The Company has untapped potential and skilled
management and employees. However, they are not well led. Zarlink needs a new
Chief Executive Officer to replace Kirk Mandy, a new Chairman, and a
reconstituted Board of Directors capable of delivering the value that
The Concerned Shareholders I represent have assembled an able and
experienced team to reinvigorate the Board and the Company. We propose to
nominate five new independent directors and hope to retain three of the
existing directors because we believe they can be effective and can provide
continuity on the Board. The New Board will review and make the necessary
changes to the Company's strategic direction and operations in order to
maximize shareholder value.
The Concerned Shareholder nominees provide Zarlink with extensive,
successful experience in the semiconductor business, public boards, general
management, governance and restructuring. Our nominees share successful track
records of building enterprise value and will operate on a hands-on basis to
complete the job that must be done.
We regard Zarlink's Directors, including those we want to replace, as
honest, accomplished and well-intentioned. We also regard the Senior
Management Team as intelligent, articulate, and capable. However, neither the
Board nor Management has been effectively led.
Lack of Value Enhancement
Since January 2002, Zarlink shares have lost approximately 95% of their
value - far worse than comparable companies. The Philadelphia Semiconductor
Index (SOX) is down approximately 15% and Zarlink's direct peers have declined
by approximately 69% on average, over the same period. Today, Zarlink trades
at a significant discount to its peer group(1) which trades at an average
Price/Book Value of 2.1x and an Enterprise Value/Last Twelve Month's Revenue
multiple of 1.9x; Zarlink trades at multiples of 1.1x and 0.7x, respectively.
Effectively, the market does not believe Zarlink has the ability to grow its
business and convert sales amounts into profits. This lack of confidence has
largely been driven by management's continued missed sales guidance.
Under Kirk Mandy's leadership, the Company's financial performance has
been poor. We acknowledge the leadership's actions in downsizing from a
Company with $1 billion in revenues to $250 million and from 6,500 employees
to 650. Some overseas offices were closed and the troubled consumer
electronics business has been sold. Yet, over the past 10 years - the
Kirk Mandy years - Zarlink lost $493 million from net income from continuing
operations (1999 to 2008). Since returning as CEO in 2005, Mr. Mandy has
produced a cumulative net loss of $31 million. In those three years, the
leadership of Zarlink has spent $138 million on R&D (including $20 million in
acquired R&D from the Legerity acquisition) and $144 million for two highly
dilutive acquisitions. The leadership appears to be desperate to find
reliable, recurrent income but not to be able to accomplish that goal.
Shareholders have little to show for that expenditure.
Exacerbated by the badly positioned product portfolio, the leadership has
been unable to make money. In this fiercely competitive industry, Zarlink's
overhead costs are unacceptably high, running in excess of 30% of revenue -
which is higher than industry norms of 14% (SOX average). Research and
development were 37% of revenue in 2008 (including acquired R&D from the
Legerity acquisition) - which is higher than industry norms of 18%
(SOX average). Those numbers place the Company at risk in an industry that
operates on very thin margins, particularly with the increasing strength of
the Canadian dollar.
Furthermore, the cost trend is heading in the wrong direction, at a time
when industry competitors have been effectively reducing overhead and cost of
sale as a percentage of revenue. Since Kirk Mandy took over for his second
term, SG&A and cost of sales as a percentage of revenue have increased by 6%
and 5%, respectively, from 2006 to 2008. Kirk Mandy's leadership has also
eroded net tangible book equity (defined as shareholder's equity less
goodwill) from $287 million at the end of 1998 to $53 million. This is an
insufficient margin of error in the turbulent markets the Company faces,
particularly after issuing unattractive convertible debt. Over this same
period, Zarlink's net cash balance (defined as cash less total long-term debt)
has been eroded from $154 million to a deficit of $17.5 million.
Along with many other shareholders, we concluded the Company lacks the
necessary vision for success and that the leaders are not moneymakers. These
factors underpin the fall in value. The Company's financial performance since
Kirk Mandy reclaimed the top job has not been acceptable. The acquisition
performance by the Company has been worse. Over $600 million has been spent on
acquisitions since 1996 and that has resulted in over $500 million in net
losses from continuing operations during the Kirk Mandy years. Some examples
of poor acquisitions include:
Legerity Holding, Inc.
We estimate that the acquisition was a major failure and has put
shareholders in a much worse position. When the acquisition was announced,
management noted that the acquisition was "accretive" and that Legerity would
contribute the following to Zarlink:
1. 2006 revenue of $113 million;
2. 2006 income from operations of $5.1 million;
3. 2006 net income of $4.1 million; and
4. Forecasted annual synergies in excess of $7 million.
Legerity's contribution to Zarlink's 2008 financial results implies,
however, that Legerity's financial performance has effectively fallen apart
since the acquisition. Legerity contributed $57 million to 2008 revenue, which
would imply $85 million on an annual run rate (as Legerity operated under the
Zarlink banner for approximately 67% of 2008). Despite Legerity's historical
positive earnings and theoretical "synergies" Zarlink's operating earnings
actually decreased in 2008 year-over-year. The Legerity acquisition also
depleted Zarlink's valuable cash balance, forcing the Company to accept an
unfavourable convertible debenture and further eroded shareholders' equity.
Analyst reaction to the Legerity acquisition has been quite negative. For
example, Brian Piccioni of BMO Capital Markets stated that: "What this deal
has done is cripple Zarlink's balance sheet, which the company may or may not
be able to recapitalize on favourable terms... We, would not, however, be
buyers of 'trust me' convertibles of a chronically unprofitable tech company
unless yields were approaching usury."(sic) (June 26, 2007).
At least one other shareholder informed me that an important motivation
behind the acquisition was in part to stave off a move by shareholders to
replace the current Board and CEO. If true, that obviously is not a legitimate
use of corporate funds. Whatever the rationale behind the acquisition, it must
be considered a failure.
Zarlink paid $225 million for GEC-Plessey Semiconductor in 1998 then sold
most of the assets in the RF Front-End business sale for $70 million in 2005.
Zarlink paid $300 million for Vertex Networks then sold most of the
assets in the packet switching asset sale for $5 million in 2006.
With the ill-considered Legerity decision and the poor positioning of the
product portfolio, the only concrete action Zarlink has taken for shareholder
value is the decision to buy back 9.6% of the Company's shares, which we
recommended as a short-term solution when the Company's finances were much
stronger. The Company's leadership has not demonstrated any long-term
Lack of Product Vision
One of the root causes of Zarlink's poor performance and worse prospects
is its lack of the driving product vision that characterizes successful
technology companies. Instead, the leadership appears to be looking for the
silver bullet that would provide less volatile revenue. It says it is "...
focusing on niche markets where customer will pay a premium for our
expertise." In this very aggressive sector, that's not vision.
The Company's product portfolio is unexciting. From an objective view,
there are no strong industry leading products. There is not one Zarlink
business that ranks in the top 10 of its segment. The portfolio is very
diverse and described by analysts as "unfocused" and by a competitor as having
a "rear view mirror" quality, which is astonishing given the uncompetitively
high levels of research and development spending.
The portfolio has four key defects:
1. There is no underlying set of defensible core competencies.
2. While the entire market is nominally large, many Zarlink products -
particularly in the Communications Division - sell against far larger
and financially much stronger competitors.
3. The Company is at least one generation behind in the concept of
selling solutions. Zarlink offers "integration" in markets that are
increasingly demanding "systems solutions".
4. The Company's time to market is too slow, according to customers and
The attractiveness of most Zarlink products peaked some time ago. Markets
now are crowded with participants, all facing consolidation and the typical
gross margin eroding pricing pressure found at the "end of the 'S' Curve".
Today, while the Company has been overspending on R&D, it is still living
off the more than $1 billion spent on research and development by Mitel more
than eight years ago. The recent R&D spending appears like desperation, an
unfocused search for the product that might define Zarlink's vision. Getting
Zarlink out of its product rut requires fresh thinking and new leadership.
Lack of Transparency
While the net effect is crystal clear, the Company's lack of transparency
under Kirk Mandy's leadership has made Zarlink more difficult to analyze,
which makes the Company a far less attractive investment. Following the sale
of the RF Front-end Consumer business in fiscal 2006, management collapsed its
three reporting segments into one consolidated group. Following the Legerity
acquisition, Zarlink started reporting segmented results again. Thus eight
quarters passed without any detailed sense of Zarlink's operations, and there
is still no ability to drill down into the trends.
Shareholders have a right to expect candid disclosure from their Board,
which has a right to demand the same from the CEO.
Allan Mishan from Oppenheimer & Co. commented:
" ... Zarlink provided segmented data for the first time since 2005. We
have routinely called for more transparency. We can now better judge the
progress in key growth areas."
Still, there is limited line of business detail. According to Susan
Streeter, who has stopped providing research on the Company:
"Operations are opaque as are international performance (sic)".
The lack of consistency and transparency in financial reporting obscured
management accountability. Analysts also complained to us, with one saying:
"We are bombarded with Company news - and it's hard to know what it all
means in terms of the tangible value for the Company".
It is possible to believe that this approach was used to obscure
investors' analysis of the precise problems at the Company. However, no amount
of camouflage can disguise Zarlink's poor financial performance.
You also must know that Zarlink's leadership is not respected by the
capital markets. One has only to look at the share price and the abandonment
of the Company by most of its financial analysts as proof of this loss of
confidence. The threat of the loss of its New York Stock Exchange listing is
one more example of faded promise. In fact, the inability of Zarlink
management to find a brokerage firm that would sponsor their recent investor
relations trip to Toronto and elsewhere is testimony to the poor regard for
Lack of Focus on Shareholders
As well as failing to lead and failing to provide full disclosure, the
current leadership of Zarlink has failed to respond appropriately to
increasing shareholder concerns.
On several occasions over the past three years, in my capacity as a
portfolio manager and shareholder I have written to the Board and met with
Directors, the CEO and other members of senior management. Each time, I have
constructively recommended that the Company make profound changes. In
June 2005, I requested the appointment of two new, accomplished Directors. In
refusing my request, Kirk Mandy asked me to be patient, promising that the
Company was on the verge of a transformational breakthrough. We waited.
However, the Company's value declined. The share price dropped from $1.62 at
that time to $0.90 today - the current price propped up by a share buy-back
scheme and the market expectation of a transformational and vigorous proxy
Kirk Mandy has a comfortable position for himself at the helm of an
organization with a rich history. Analysts and former executives with whom we
spoke used terms like "too comfortable", "too complacent" and "too distant
from customers, suppliers and the management." Some of his executives
criticized his work commitment. In the face of abysmal share performance, Kirk
Mandy has been unresponsive, dismissive and glib when faced with legitimate
shareholder questions and suggestions.
Not delivering shareholder value is bad enough. Not caring about that
failure makes it worse.
It is time to rectify this intolerable situation.
Lack of Leadership - Time for Immediate Action
Zarlink shareholders are repeatedly told to be patient. As recently as
two weeks ago, Kirk Mandy said he needed another four to five years and
significantly more capital expenditure. The time for change has arrived.
For far too long, shareholders and the Board have given the benefit of
the doubt to the two-time CEO, Kirk Mandy. The Company's performance and
leadership are unacceptable. We say it's time for a change.
We urge you to make the necessary changes to senior management, to accept
our nominees to the Board and provide them the platform to make the strategic
and operating changes necessary for financial success. We ask you to support
this effort on behalf of all shareholders. With that support, Zarlink, its
Board and CEO can make a smooth and successful transition to new leadership.
The alternative is a proxy contest to replace the current Board with new
Directors who are focused on shareholders and capable of delivering value. We
are fully prepared to launch such a contest immediately. We are also confident
of winning: The facts support us and we are convinced Zarlink shareholders
will as well. We hope that you will agree that it is not in the best interest
of Zarlink shareholders for the current Board to spend the Company's scarce
resources in a futile effort to entrench its CEO.
Please carefully consider the Company's very poor performance relative to
its peers and the semiconductor industry since Kirk Mandy's return. Making
Zarlink a success requires an immediate leadership change. Your shareholders
deserve nothing less.
We respectfully request your agreement within the next 24 hours to
present our proposal to the entire Board on Wednesday, July 2, 2008. Should we
be rebuffed once again, we will take our proposal directly to our fellow
shareholders and formally launch our proxy solicitation.
On behalf of the Concerned Shareholders of Zarlink Semiconductor Inc
The Concerned Shareholders are disappointed by the Board's unwillingness
to meet to discuss their proposal, but remain hopeful that the Board will take
immediate action that will mean a shareholder proxy contest can be avoided.
NOTE: This news release and the letter to the Board included in it are
not, and are not intended to be, a solicitation of proxies.
(1) Peer group includes Applied Micro Circuits Corp., Centillium
Communications Inc., Conexant Systems Inc., Exar Corp., Ikanos
Communications Inc., Integrated Device Technology Inc., Mindspeed
Technologies Inc., PMC-Sierra Inc., Semtech Corp., Silicon
Laboratories, Inc., and TranSwitch Corp.
For further information:
For further information: Scott Leckie, (416) 363-3399