Opinion: A pitched battle for Zarlink

These are hand-wringing days for members of Zarlink Semiconductor’s board – indeed, probably for anyone with a financial stake in the $200-million-plus Mitel spinoff company.

As was first reported on Ottawabusinessjournal.com in early July, a splinter faction of concerned shareholders – christened the ‘Leckie group’ in honour of their leader, fund manager and 5.2-per-cent stakeholder Scott Leckie – has challenged Zarlink’s board to a public duel. Quickly dispatch CEO Kirk Mandy and others on the management team, the dissidents demanded, or they’d do it for them via a proxy vote.

Well. If a bitter, divisive conflict is what they wanted, then at this point they’ve certainly got it.

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Proxy votes, as they go, are curious animals. Each shareholder is given one vote – they’re either with the company’s current incarnation, or against it. They’re not exactly democratic votes in the political sense, either – votes are tallied on ‘proxies,’ rather than ballots, that other parties can complete with permission of the shareholder – but sometimes, like right now, proxy votes can profoundly sway the fortunes of a company (for a previous Ottawa example, try Googling ‘MOSAID’ and ‘Loeb’).

In any case, Zarlink’s current scrap will determine the fates of nearly an entire management team and as such, both camps are agitating with a vengeance. Proxy battles are often fought in the media, and neither side has disappointed in this regard – waves of press releases have been pumped out of both camps since Mr. Leckie’s initial announcement.

The dissidents’ view? The company’s stock has tanked and its cost structure is inflated. And in many ways, they’ve got a point. Zarlink shares have dropped 95 per cent since January of 2002, though they’ve ridden an upward wave this year and now sit around the $1 mark.

Interestingly, its share price on the TSX gained when the dissidents came forward, but has since settled back to around 90 cents or so.

But the company’s view? The worst of its stock troubles are over, and after signing some major deals they’re ready to rock ‘n’ roll.

After all, successful semi companies like Tundra and March Networks have also suffered a dip in stock price over a similar time period. Does that mean they’re also mismanaged? Not likely. “After three years of hard work, management and the board have positioned the company to break even in the first quarter of fiscal 2009, and be profitable for the fiscal 2009 year,” read a letter to shareholders released last week.

Zarlink has hired proxy solicitation firm Georgeson Shareholder to administer the ongoing vote, according to the company’s website. As such, they’ll most likely be able to a) figure out who owns what Zarlink stock, thus targeting those holders for an obvious charm offensive, and b) tally the votes as they roll in, in anticipation for the company’s AGM on July 23. Many proxy fights are settled in the days leading up to a company’s AGM, as one side or the other realizes inevitable defeat.

This one will likely be no different, though the outcome is anybody’s guess.

It’s even possible that Mr. Leckie’s group hoped to catch Zarlink’s board flat-footed, considering they waited to drop their initial bomb three weeks before the company’s scheduled AGM. But given Zarlink’s coherent and impressive counter-attack, it’s possible Mr. Leckie’s desire to overthrow the board was already on the company’s radar.

Whatever happens, you can bet those at Zarlink are waiting with bated breath.

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