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McClatchy-Tribune  06/11/2014 12:01 AM ET
Hedge fund wants Orbotech board changes [Globes, Tel Aviv, Israel :: ]

June 11--Orbotech Ltd. (Nasdaq: ORBK) co-founder and chairman Yochai Richter may find himself out of a job next month. On Monday, the automated optical inspection equipment manufacturer reported that a shareholder, ION Asset Management, a hedge fund, is demanding changes in the company's management and board of directors ahead of the general shareholders meeting scheduled for July 10.

The shareholders are due to elect four of Orbotech's ten directors, including Richter. The company has also re-nominated Siemens Israel managing director Eliezer Tokman, who has served as a director since 2007; and two external directors, Michael Anghel, a former executive at Discount Investment Corporation (TASE: DISI), and Joseph Tenne, a former CFO at Ormat Industries Ltd. (TASE: ORMT).

Orbotech's other directors are well-known figures in Israeli business: outgoing Ormat CEO Yehudit Bronicki; Orbotech co-founder Jacob (Kobi) Richter (Yochai's brother) and the owner of stent maker Medinol Ltd.; NaanDan Jain Irrigation Ltd. CEO Avner Hermoni; and former Orbotech VP Dan Falk.

ION Asset Management, which owns 6.17% of Orbotech, is fed up with its management, which has not created shareholder value in recent years. It asserts that the problem is not with the company's products or executives, but with its directors. "We believe that the problem rests with Orbotech's board, which is comprised primarily of insiders with long tenures who are protected by the staggered board structure," it says.

ION argues that Orbotech's board of directors is not independent (seven of the ten directors are former executives), they are elderly, and out of touch with the industry. The directors' average age is 67, and they have served for an average of 13 years.

ION is proposing four nominees of its own, all of whom are younger and have track records: former Nova Measuring Instruments Ltd. (Nasdaq:NVMI; TASE:NVMI) CEO Gabi Seligsohn, who currently serves as CEO of Kornit Digital Ltd. and as a director at DSP Group Inc. (Nasdaq: DSPG); Ronnie Kenneth, the former CEO of Voltaire; Tsipi Kagan, who served as CFO at RadVision Ltd. and Ceragon Networks Ltd. (Nasdaq: CRNT; TASE:CRNT); and Jonathan Kolodny, CEO of Jardin International Holdings, where he is responsible for the overseas business of Keter Plastics Ltd.

ION is also demanding that Orbotech change the way it elects its directors, from a staggered board to the reelection of all directors at every general shareholders meeting, as is the practice in the US. Currently, Orbotech elects directors once every three years.

ION also demands that Orbotech assess its capital structure every six months, including its dividends and share buyback policies. It notes that Orbotech had $211 million in cash and no debt at the end of March.

Orbotech said in response, "The company is in regular contact with all its shareholders, including ION, for the good of the company and the interests of all its shareholders in the present and in the long term."

ION is a hedge fund founded in 2006 by Jonathan Half and Stephen Levey, who previously established the Israeli office of UBS AG (NYSE; SWX: UBS). It has NIS 800 million in assets under management. Orbotech is its largest investment.

Orbotech's share price has fallen 36% since ION first invested in the company in early 2006. Nasdaq has gained 93% over the same period. The share's underperformance can be attributed to three strategic decisions by the company during this period: the acquisition of Photon Dynamics in 2008 for $290 million, which has turned out to be too much; its entry into medical imaging, which has cost the company $67 million; and the secondary offering in 2011, when it raised $97 million at $12.50 per share. The company has since held onto this cash, earning negligible interest rather than using it for a strategic move.

ION's letter is the latest act in shareholder activism at an Israeli company on Wall Street. The previous challenge was at Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), when Benny Landa demanded that it reduce its directors and appoint new directors from the pharmaceutical industry.

US private equity funds have also taken activist measures. Starboard Value LP ousted DSP CEO Eli Ayalon and caused the election of its directors, after previously ousting Zoran chairman Uzia Galili and other directors. If ION wins the support of other large Orbotech shareholders, Richter could find himself in good company.


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