Thursday, September 11, 2008

Update on Photon Dynamics: A Buy Right Now?

Yesterday's blog was devoted to speculation as to why shares in Photon Dynamics plunged yesterday. Here's an update that was just posted by Eric Savitz at Barron's who also was wondering the same thing:

There’s still something not yet clear about the weird sell-off yesterday in shares of Photon Dynamics (PHTN).

To review: PHTN holders on Friday approved a pending $15.60-a-share cash takeover of the company by Orbotech (ORBK), an Israeli-based rival in the LCD display equipment business. But the stock yesterday hit an air pocket, dropping $2.19, or 14.5%, to $12.89, and trading as low as $10.74. I theorized that the drop might have had something to do with the role in the deal played by Lehman Bros., which has been an adviser to Orbotech. Late in the day, the company issued a release which said that the only hurdle left to completion of the deal is approval of the transaction by the Committee on Foreign Investment in the United States. Photon said CFIUS is supposed to respond by September 29, and possibly sooner.

In a research note this morning, Needham’s James Ricchiuti says there were concerns about possible exposure of Israeli banks - presumably those that are providing the financing Orbotech requires to complete the deal - to the problems at Lehman.

Ricchiuti also notes that Photon owns a small business called Salvador Imaging which has some exposure to the defense market. (Example: the company has a deal with Raytheon for high-performance surveillance cameras used in military aircraft.)

As for the status of financing on the deal, Richiuti writes that he talked to Orbotech yesterday, and that “management reiterated that the company has firm commitments for the financing with three Israeli banks.”

Thank you Mr. Savitz for investigating the situation in the first place and following up on it!

If this report is true, and I can't think why it wouldn't be, then Photon Dynamics is a great play right now at the current price of $13.60. The merger is expected to close in just a couple of weeks (or even sooner) at a price of $15.60 per share. This represents a 22% return on the trade or an annualized return of over 400%. Before the merger was announced, the stock was trading around $12 so even in the off-chance that the deal falls through, your loss should be less than $2 which isn't bad considering the rich potential profit.

Disclosure: I bought a full position of PHTN yesterday at $14.44/share for the MANDA Fund and purchased more shares this morning at $13.63 for my personal account.

Photon Dynamics: Partial Recovery, Partial Explanation, by Eric Savitz at Barron's Online. 9/11/08

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

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