Monday, September 28, 2009

Shareholders request cash dividend from EFII

AlphaNinja - After waiting patiently for the results of a stock buyback program, Blum Capital Partners is turning up the heat on management at Electronics for Imaging (EFII). There's some interesting rationale here, especially in terms of what benefits shareholders versus option holders.

In a 13d/A filing, Blum uses what I'd call "firm but fair" language to request that the company pay a one-time $2 dividend per share, as a way of returning some of the company's excess cash. They note that even after dispersing this $100million to shareholders, the company will still have a huge cash balance.
"even after using $15.5 million of cash from operations for the first six months of2009 during arguably the worst economic environment the company has ever faced, EFII still has approximately $279 million of cash and short-term investments and no debt. We believe the company will begin to generate cash from operations in the very near term as the economy stabilizes, and thus returning $100 million to shareholders via a special dividend would still leave the company with an ample balance of $179 million that would continue to grow in the future."

I often feel there is little value to be added by recapitalizations, share buybacks, special dividends, etc. -->> at least not nearly as much value as is added by competent management that allocates capital wisely on high ROI investments. Blum Capital may feel that they can re-allocate the $2 per share currently tied up with EFII to an investment with more upside.
A before and after look at a potential one-time dividend:

Why might management prefer to continue with stock buybacks rather than special dividends? Because, as Blum Capital points, out, dividends only help shareholders. They do not help holders of stock OPTIONS, including the roughly 5.5million stock options owned by employees and officers of EFII:

"we feel it is critical to state that in our own experience serving on corporate boards, the fiduciary obligation of directors is to shareholders, not option holders. EFII has various stakeholders who receive equity options as consideration for compensation, including, of course, company management and board members. While the benefits of a share repurchase program inure not only to shareholders but also to option holders, generally a special dividend benefits stockholders exclusively (unless option strike prices are provisioned to reset following a dividend payment). We understand and appreciate this potential conflict of interest, but remain firm in our belief that shareholders' interest supersede those of option holders, and expect all of our portfolio companies to act accordingly in their governance. We conclude by respectfully requesting that the company and its Board of Directors listen to its shareholders and distribute to them a $2 special dividend immediately."

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