Is Starboard Value Right on These 3 Companies?
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Starboard Value is a New York-based hedge fund that adopts a fundamental approach to invest in publicly traded companies. It invests in undervalued companies with small market cap. As a result of its investment strategy, assets under management surged to $1.1 billion in the first quarter of 2013, showing growth of 26% quarter over quarter.
Recently, Starboard bought around 15% stake in Office Depot (NYSE: ODP) and invested in two technology companies, which are Compuware (NASDAQ: CPWR) and Integrated Device Technology (NASDAQ: IDTI). Due to the recent investments of Starboard in these companies, I have analyzed these stocks to find investment opportunities for investors.
Divestiture of Mexican subsidiary
In February 2013, Office Depot announced the merger with OfficeMax (NYSE: OMX). Combined revenue of both companies was $18 billion in fiscal year 2012. This merger will bring cost synergies of around $500 million for Office Depot by 2015. The merger of both companies will be completed in the current fiscal year. After this merger, combined assets of both the companies will be around $2 billion, out of which $1 billion will be in cash, while over $1 billion will be in revolving credit facilities.
Together, both companies will have 2,400 stores globally. Out of those stores, 25% loss-incurring stores will be shut as a part of the merger strategy. Operating costs of around $750 million will be saved by the closure of these stores. Taking this into consideration, the merger will be beneficial for Office Depot, as it will reduce costs significantly and will lead both Depot and Max to build a stronger entity. Also, cash generated from the merger will be reinvested in developing e-commerce and omni-channel retailing, which will boost future growth.
Office Depot's Mexican subsidiary contributed $32 million in profits in the first-quarter ending in March 2013. However, net annual loss of $100 million was posted in the same period of the previous year, which shows decline for the company. Office Depot is planning to sell its Mexican business, as it is not growing as per estimates. In the first quarter ending in March 2013, Grupo Gigante offered around $690 million to buy 50% stake in Office Depot's Mexican subsidiary. As per the regulations of the merger with OfficeMax, permission for the stake sale is required from OfficeMax. It is estimated that by selling the Mexican subsidiary, it will bring additional cash of $690 million and will halt further loss from this subsidiary.
The merger with OfficeMax will reduce operational costs of Office Depot, and stake sale of the Mexican subsidiary will bring additional cash. Both these activities will bring $1.7 billion in cash for Office Depot by the end of 2013 or early 2014.
Diluting stake in subsidiary and cost reduction plans
In May 2013, Compuware filed documents for Initial Public Offer for its fully owned subsidiary, Covisint. Compuware will dilute 20% stake in Covisint for $100 million through IPO. Moreover, Compuware will allot its remaining 80% stake in Covisint to the shareholders in fiscal year 2014.
Covisint offers cloud-based platform services, portal services, business to business data exchange, supply chain integration, and application development. It recently launched a new and enhanced supplier portal that will improve simplicity, usability, and mobile accessibility for its customers.
Covisint has 150 customers in automotive, health care, and energy verticals for its cloud engagement portals. These verticals contributed to 91% of the total revenue of the company. Covisint will further expand its platform offerings to financial services and public sector companies in 2014. By this expansion strategy, its revenue will surge 20% in the next fiscal year.
In the first quarter of 2013, Compuware introduced a cost reduction strategy of around $80 million-$100 million in the coming two years. It has initiated this plan for fiscal year 2014 by estimated cost reduction of $40 million. This plan will boost the company's profit in fiscal years 2014 and 2015. Divestiture of Covisint will also reduce additional costs of Compuware by $60 million annually. By implementing its cost reduction plan, it will maintain its policy to give dividends of $0.50 per share to its shareholders.
Investors of Compuware will get benefits of the business expansion of its subsidiary, Covisint, while Compuware's cost reduction plan will be beneficial in the next two years.
New products driving revenue
The communication segment contributes 58% of the revenue of Integrated Device Technology. In the quarter ending in March 2013, new products of the company contributed around 21% in revenue, which is a 2% increase from the previous quarter.
In May 2013, total subscribers of 4G long term evolution, or LTE, were 55 million in North America as per the research report from Informa. The company launched a new product, “Serial RapidlO” which is used in 4G wireless communication of high-speed data for mobile phones and data terminals. Currently, North American service providers are building 4G wireless infrastructure. Taking this into consideration, growth of 4G LTE will further push demand for its interface in North America. The company estimates 3% quarter-over-quarter growth in the communication segment with the launch of its new product Serial RapidIO.
China's largest service provider, China Mobile (NYSE: CHL), is planning to expand 3G and 4G LTE base stations in China. In the initial phase, it established 20,000 base stations in China, which will be 200,000 in total across 100 Chinese cities by the end of 2013. In May 2013, China Mobile issued a tender worth $6.46 billion for LTE.
Integrated Device Technology, being a global market leader in LTE devices, is expecting a huge order from China Mobile. The company is already supplying LTE to China Mobile's LTE pilot project. However, tenders will be allotted at the end of June 2013. If a contract from China Mobile is received, it will give massive benefits to the company by the end of 2013 and 2014.
Integrated Device Technology is anticipating revenue of around $90 million from its new products in fiscal year 2013, which means growth of 65% year over year. China Mobile's LTE base stations order will significantly increase revenue of the company.
The merger with OfficeMax will reduce operating costs of Office Depot, and selling a loss-making Mexican subsidiary will halt further losses.
Covisint's plan to expand in other verticals will boost the revenue of Compuware. Moreover, Compuware's cost reduction plan will improve profits during next fiscal year.
The new product line of Integrated Device Technology is promising. Also, a new LTE contract from China Mobile will boost the revenue of the company in 2013 and 2014.
I recommend buying all three stocks.
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Shweta Dubey has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!