Wednesday, September 10, 2008

MANDA Addition: Photon Dynamics, for Better or for Worse

While surfing the market this morning, my charting program alerted me via its quaint 1920s roadster eye-ooh-ga horn that Photon Dynamics (PHTN), a maker of test equipment for LCD displays, had crossed below the threshold I had set for possible inclusion in our M&A portfolio, the Manda Fund. (See below for merger details.*) This was around 8:45am Pacific time when the stock went into freefall. Hm. Something must be up. I scoured the news sites and even googled both companies searching for any clues as to the mysterious drop. Finding nada, I called Photon Dynamics and of course was directly connected to voicemail. (I can't even remember the last time I called a company and a human being answered, nor can I remember ever getting any of my messages returned. I wonder if Buffett has this problem...)

Anyway, the stock was starting to firm up so I thought I'd take a chance and buy some. This was at 9am and the price was $14.44, which would be a nice 8% yield for a two week trade. As fate would have it, I had to go rush out to a meeting and upon returning I saw that the stock had plunged even further to $10.74. Yikes! Did the CFO abscond with company funds?

I did another news search where I found a fellow compatriot, Eric Savitz, at Barron's who noticed the same thing. He too called the company, got the same voicemail, and left a message which has not been returned. But what he does have is a theory, and I quote from his article**: So, now I’m wondering if the completion of the deal has been affected by the issues at Lehman, which has been Orbotech’s financial advisor on the transaction. The deal, which was for about $290 million, was to be financed by a combination of internal and external funds. If there were issues raising enough cash to close the transaction - Orbotech’s balance sheet cash was not sufficient to complete the deal - it might put the acquisition in jeopardy. Just a theory, mind you.

And a valid one. Orbotech will need a source of outside financing considering that last year's revenues were $392 million with only $154 million in cash. The burning question is whether Lehman is able to provide those extra funds at this time. If not, is there another investment bank willing to step in and lend a helping hand, so to speak?

Later this morning in a possible attempt to soothe panicky investors, Photon Dynamics issued a press release saying that the only closing condition left for its merger is clearance from the Committee on Foreign Investment in the U.S. The waiting period for the body, which examines deals involving foreign investment, expires on Sept. 29, but a response could come sooner. Although they sidestepped the issue of today's panic sell-off, the announcement did seem to assuage investor fears somewhat with the stock trimming its loss—up almost two points—going into the closing bell.

If indeed this deal is being queered by Lehman, I wouldn't be surprised to see some angry shareholders showing up in Photon Dynamics' executive suite. For me, I've learned that perhaps sometimes it's better to wait until the dust settles before jumping into a trade—a mistake that I have made a few times in the past, sorry to say. The failure rate of the MANDA strategy is low (see Recipe #13: Post-Takeover Tacos), and unfortunately this might be my first one. Wah!

*Merger Details: Briefly, the company is being acquired by Israeli-based Orbotech (ORBK) for $15.60 per share in cash. Just last week, Photon Dynamic's shareholders approved the deal which is expected to close by the end of this quarter.

**What's Wrong with Photon Dynamics?, by Eric Savitz at Barron's Online. 9/10/08

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