Mellanox Jumps on CEO-Chair Split Vote: Israel OvernightLeslie Picker
Mellanox Technologies Ltd., the Israeli software developer down 52 percent from last year’s peak, is gaining on speculation shareholders will endorse splitting the chairman and chief executive roles to bolster confidence in the company’s earnings forecasts.
Shares of Mellanox, which makes data transferral and storage software, rallied 6 percent last week to $57.02 in New York, capping the biggest advance in a month. The Bloomberg Israel-US Equity Index of the largest Israeli companies traded in the U.S. added 1.6 percent, while the shekel had its biggest weekly retreat in 20 months after policy makers cut rates.
Investors will learn the results of a vote on whether to appoint Eyal Waldman as both chairman and CEO for another three-year term at an annual meeting tomorrow, according to a proxy statement filed with U.S. regulators last week. GAM U.K. Ltd. and Oberweis Asset Management Inc. are calling for the jobs to be separated after Mellanox cut its fourth-quarter sales outlook three weeks before reporting in January and then forecast two quarters of sales trailing analysts’ estimates.
“I want to own more in the company, and I can’t own more of it until they show me they can have a better track record of results versus guidance,” Mark Hawtin, director of investments at GAM U.K. in London, said in a phone interview May 16. “If there’s somebody else with a position of authority participating in that guidance discussion, it’s something that would help.”
GAM manages $100 billion in assets and recently pared back Yokneam Elit, Israel-based Mellanox, which used to be in the top 25 percent of its holdings.
“We don’t need a chairman for that,” Mellanox’s Waldman said of improving the company’s forecasting. He spoke in a May 17 phone interview from New York after the U.S. markets closed. “We have a smart board of directors and we are consulting with the board every quarter about the guidance.”
Mellanox postponed its annual meeting from May 13 as votes in some of the brokerage accounts were delayed, said Waldman, who co-founded the company and has served as its president, CEO and chairman since 1999. The vote tomorrow should favor his reappointment as chairman and CEO, Waldman said.
He said that it’s “less expensive” and “more efficient” for the company to keep the roles combined
Mellanox has issued sales forecasts below analyst estimates for three reporting periods. Second-quarter sales will be as much as $97.5 million, Mellanox said April 24, trailing a $108 million average of 14 analysts’ estimates compiled by Bloomberg. That follows the company’s first-quarter revenue forecast announced on Jan. 23, which was below estimates by as much as 48 percent. Earlier in January, Mellanox cut its fourth-quarter revenue outlook on weaker demand and a product glitch.
“Mellanox has been circling back with a lot of their top shareholders to persuade them why it’s logical to have the same CEO and Chairman,” Andrew Nowinski, analyst at Piper Jaffray Cos., who rates the shares a buy, said in a May 15 phone interview from Minneapolis. “They didn’t believe the count was accurate and now they’re circling back to pitch their agenda.”
Institutional Shareholder Services Inc. recommended last month that Mellanox investors push for the separation of the CEO and chairman roles. The Rockville, Maryland-based proxy advisory firm made similar proposals in 2007 and 2010, when 11 percent and 26 percent of voting investors respectively opposed re-appointing Waldman as chairman, Patrick McGurn, special counsel to ISS, said in a May 16 e-mail.
Fidelity Management & Research Co. is the largest shareholder in Mellanox, holding a 14 percent stake as of a May 13 filing, data compiled by Bloomberg show. Nicole Goodnow, a director of communications in Boston, said by phone May 17 that Fidelity does not comment on specific holdings. Oracle Corp. holds an 8.8 percent stake as of May 13 and also declined to comment, according to an e-mail May 17 from Deborah Hellinger, a Redwood City, California-based spokeswoman.
The larger Israeli investors are more in favor of a split, while U.S. shareholders don’t mind the dual role, Waldman said.
“We decided to sell our long position and go short because we felt like we couldn’t really trust the guidance they were providing,” said Kenneth Farsalas, director of U.S. equities and fund manager at Oberweis Asset Management, which oversees $750 million in assets, said in a phone interview from Lisle, Illinois May 14. “Anytime you have two different individuals as chairman and CEO, it gives a little more comfort in terms of corporate governance.”
Wall Street doesn’t have tremendous confidence in the company’s outlook, Farsalas also said, pointing to the range of analyst estimates on the company’s results. Analysts’ projections for Mellanox’s 2013 adjusted earnings per share has the widest range compared to a basket of 15 semiconductor peers compiled by Bloomberg. The highest estimate is $1.70, while the lowest is 93 cents, a spread of 77 cents, compared to the group’s average of 43 cents.
Mellanox in the U.S. closed at a $2.21 premium relative to its Israeli counterpart, the most among all dually traded companies. Its advance to $57.02 in New York compares to a weekly gain of 7.3 percent in Tel Aviv to 201 shekels, or $54.80. The shares in Israel today narrowed the gap, adding 3.9 percent to 208.8 shekels, or $56.94, at the close in Tel Aviv.
The Bloomberg Israel-US gauge advanced 1.6 percent to 93.64 in the week, the highest since Aug. 3, 2011. The TA-25 Index rose for a third day, gaining 0.6 percent to 1,222.72.
Caesarstone Sdot Yam Ltd. was the biggest gainer on the Israel-US gauge last week, jumping 11 percent to $27.97, a record high. The maker of quartz-based countertops signed an agreement with Ikea Group to serve as its sole non-laminate countertop vendor in the U.S., according to a statement released May 16.
Cellcom Israel Ltd. posted the largest declines, falling 10 percent to $8.55. Israel’s largest mobile company, based in Netanya, slipped for eight straight days, the longest stretch of retreats in a year. Shares in Israel today slid for a fifth day, declining 0.3 percent to 31.44 shekels, or $8.57.