Micrel, Inc. and its Board of Directors issued an open letter to its shareholders regarding public letters and filings by Obrem Capital Management ("OCM"), which is a new Micrel shareholder and which has made several proposals to the company. OCM is claiming that Micrel’s stock is undervalued and that the company consider its strategic options, which include selling the company. OCM has also asked for the removal of the Board and offered to take Micrel over.
The following are portions of Micrel’s open letter:
"We are writing you in response to recent public statements and proposals by Obrem Capital Management. We believe OCM has made a number of inaccurate and self-serving assertions in their letters and proposals in relation to their efforts to take control of the company’s board of directors. We want to take this opportunity to outline for all shareholders the facts about Micrel and why we believe continuing to execute our strategic plan will deliver superior long-term value for you.
"While there is no question that recent market conditions have been challenging across the semiconductor industry, and Micrel has not been immune to these conditions, we have been taking important, measurable steps in recent quarters to ensure the company continues to outperform our peers and expand market share while continuing to reduce costs and increase profitability. We are excited about the company’s future.
"Micrel has increased revenue in 24 out of its 29 years of existence and our ten-year revenue compound annual growth rate of 9.5% has significantly outpaced the overall analog industry growth rate of 6.3%. We are pursuing an R&D strategy to increase our product and design win pipeline that we believe will position the company for superior revenue growth in the future.
"In addition to growing our top line, your Board and management team have, against a backdrop of a challenging time in the semiconductor industry, driven earnings growth through operational improvements. Between 2003 and 2007, we improved our GAAP gross margin from 39.5% to 57.1% and our operating margin from 2.4% to 18.4%, significantly growing GAAP earnings. During the same period, we also improved our return on equity from 1.7% to 18.6%. We continue to take actions to streamline operations and reduce manufacturing costs.
"Contrary to OCM’s statements, Micrel outsources manufacturing where it makes sense to control costs, including the outsourcing of all of our assembly and over ninety percent of our test operations. We believe there are substantial benefits to both Micrel and customers of our vertically-integrated front-end manufacturing strategy. Our captive wafer fabrication facility, together with third party foundries, allows us to optimize the company’s cost, quality, delivery, customer service, time-to-market, and technology roadmap.
"We believe OCM’s statements about Micrel’s cost structure and operating margins reflect their lack of in-depth knowledge about the industry and that their filings contain factual errors and inconsistencies, such as the mixing of GAAP versus non-GAAP metrics in their comparisons and the use of an extremely narrow and ‘cherry-picked’ set of comparables. As compared to a broader and more representative set of analog companies, our operating margins are in line with or, in the majority of instances, superior to these peers. In 2007, our GAAP operating margin was 18.4%, compared to a median of 13.9% for such peers. The company’s 2007 GAAP SG&A as a percentage of sales was 17.5%, placing us at the lower end of the peer group and significantly below the median of 20.5% for our peers. It is also worth noting that Micrel has lowered SG&A expense by more than 20% over the past 8 quarters.
"As OCM apparently only commenced acquiring Micrel shares a few weeks ago, the lack of understanding of Micrel’s business and the industry is not surprising. However, this obvious lack of knowledge and experience is troubling to the Board and should be troubling to other long-term shareholders as OCM is seeking control of the company.
"In addition, OCM has proposed removing your CEO and the entire Board, which includes the company’s largest shareholder. We believe their nominees have very limited semiconductor industry and operating experience and that your directors bring a valuable blend of deep strategic and operational expertise to their work on the Board."
