Robeco proposes solution to ASMI undervaluation
Henk Grootveld, Sylvia van Waveren
Robeco came forward at ASMI’s recent AGM to suggest an answer to the company’s persistent undervaluation: a share buy-back. Sylvia van Waveren reports.
On 15 May, Henk Grootveld, manager of the Dutch equities fund Robeco Hollands Bezit, took the floor at the ASM International (ASMI) shareholders’ meeting. It was a first step to ending the persistent undervaluation of this semiconductor equipment supplier’s stock, writes Engagement Specialist Sylvia van Waveren.
The problem is this. As well as manufacturing semiconductor production equipment—the so-called front-end business—ASMI also has a 53% interest in ASM Pacific Technologies (ASMPT), which is involved in the back end of the industry (assembly and packaging equipment).
Based on its price on the Hong Kong stock exchange, the ASMPT stake is worth more than the whole of ASMI on the Amsterdam exchange. As a result, the front-end line has—on paper—a negative value of around EUR 500 million.
Mr. Grootveld noted that Robeco currently owns around 1.5% of ASMI’s outstanding share capital. While he described himself as a “satisfied” shareholder, he added that the situation would clearly improve if the undervaluation were to be eliminated.
“We wish to remain [satisfied] in future, too, and would like to continue to witness sustained good results from a company that is unambiguously in charge of its own future and is not vulnerable to an outsider intent on benefiting from the present undervaluation,” he commented.
Front end/back end combination does add value
Furthermore, he indicated that, as a committed long-term shareholder, Robeco is happy to develop solutions for the undervaluation. Ultimately, however, it would be management’s responsibility to come up with a plan to remedy this undervaluation on the stock market.
What is the way forward here? The first thing to note is that we believe that the management strategy is broadly correct. As such, we agree with management that combining the front-end and the back-end divisions under one roof does add value to the company, its employees and its shareholders. Both parts of the business are cyclical, but have slightly different cycles. As a result, the combination of the two is more stable than the separate parts. Moreover, the combination secures the stable cash flow that is needed to continue researching technological improvements, for instance.
At the same time, there is quite some scope for improvement. In terms of business operations, we see extensive opportunities for the front-end business to learn from the back-end process. One example of this would be adjusting capacity more quickly in times of economic slowdown. In addition, significant gains should be possible from centralizing purchasing and customer service.
Robeco proposed a share buy-back to unify the company
There’s a logic, then, to the two divisions being united as a single company and the company having a unified legal structure. Mr. Grootveld outlined a simple, low-cost way to merge the two parts of the company: a share buy-back. According to our calculations, it would be the “cheapest buy-back of the century”.
After such a transaction, ASMI’s shareholders would be freed from the undervaluation and would be shareholders in a combined company that would be 100% owner of the front end and the back end. That should offer more stable growth prospects.
Arthur del Prado, the founder of ASMI, its former CEO and still a large shareholder, supported our view that it was high time that ASMI’s undervaluation was tackled. Clearly, there are different ways to achieve this and Mr. Del Prado asked the board to consider splitting ASMI from ASMPT, rather than merging the two as proposed by Robeco. Other shareholders joined in and a lively discussion resulted, in which the merger proposal was the main reference point.
Robeco called for an extraordinary shareholders' meeting before the end of 2012 at which shareholders should decide on a proposal to remove the undervaluation. Meanwhile, ASMI’s management board promised to share with shareholders the outcome of research they have commissioned from an investment bank about the future of the company.