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Investors Could Do Battle With Hardware Firms

By Reuters  |  Posted 06-24-2008 Print
They used to be a problem just for Internet and media firms, but activist investors are about to go after the equipment makers, too.

Rabble-rousing investors are an increasingly familiar, if unwelcome, sight for the boards of Internet and media companies like Yahoo and CNET. But these activist shareholders may next set their sights on IT hardware companies, Bernstein analyst Toni Sacconaghi said in a research note Monday.

Sacconaghi specifically identified three companies--storage equipment maker EMC, printer maker Lexmark and Sun Microsystems--as likeliest to capture the attention of activist shareholders, in that order. "These stocks are at or close to multi-year valuation lows... and offer distinct opportunities for value creation," Sacconaghi wrote. But he also outlined risks in each case that could squeeze the potential pay-offs to investors.

An activist investor could pressure EMC to spin off virtualization star VMware, of which it owns about 85 percent, and pump some value back into its stock, Sacconaghi said. Of course, EMC's chief financial officer said just last month the company has no intentions of doing so. If EMC changes its mind and sells off the stake, VMware's own high-flying stock price might plummet, limiting any gain EMC's stock price would get.

In the case of Lexmark, an activist shareholder could seek value by urging the company to explore a sale or other "strategic alternative" for its licensing business. The investor could also push Lexmark to trim its operating expense or provide more clarity on its laser printer business, which Sacconaghi said the market is "increasingly anxious" about. But a key question is whether the inkjet printer business is separable from the rest of Lexmark, Sacconaghi said. Also, Lexmark recently announced a debt and share buyback program.

As for Sun, Sacconaghi said a dissident shareholder could push the company to undertake a major restructuring, although he acknowledged that there are few examples of activist shareholders proposing to improve a company's operations. What's more, giant buyout shop KKR has held a board seat in Sun for the past year, and Sacconaghi reasoned that there's been no "discernible improvement" in Sun's profitability despite KKR's presence. That could mean there's little else to be done to improve Sun's operations.

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