Monday, March 13, 2006

Vishay Clarifies its Intent-

Vishay Intertechnology this morning released the following:

Vishay Clarifies

The basic message of their release is that the company is only seeking authorization to create the Class C shares but that it is not their intent at this time (my emphasis) to issue those shares. Furthermore, the company mentions its history of using cash and debt rather than stock for acquisitions when it considered the stock to be undervalued.

My comments:

1) In my view, one of the best signals of undervaluation to minority shareholders is to repurchase stock. This hasn't happened since 2000 when the company bought back merely $5.7 million of the stock. At the end of FY 2000, there were roughly 137 million shares outstanding, revenues were $2.47 billion and EBIT was $715 million. At the end of FY 2006, there are 189 million fully diluted shares outstanding up about 40%. Revenues are essentially flat at $2.3 billion and EBIT is $111 million.

2) Corporate governance is undermined by the mini-vote accorded the new class C stock in my opinion. Whether the new class C stock is issued now or later, management has indicated that it chooses to be entrenched by providing shareholders even less say. Class B shares, controlled by Dr. Zandman have ten times the vote of the common. Class C shares will have one tenth the vote of the Class A and consequently one one-hundredth the vote of a "Zandman" common. In my view, boards of directors are more accountable to shareholders when they have to respond to a meaningful vote of minority shareholders. A broad system of accountability is created by providing meaningful voting rights.

3) Returns on capital remain sub-standard. Returns on capital of 2-3% are well below any reasonable guess at cost of capital. This is true for many of VSH's competitors as well, however, many are earning higher ROIC. For example on a TTM basis, AVX has a 4.1% ROIC, CTS has 4.8%, and International Rectifier 5.4%. AVX and CTS have bought back stock as well as returned capital to shareholders through dividends.In the most recent quarter, the return on capital for AVX is 6.65% and that of CTS is 8.11% whereas VSH's is less than 3%.


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