Saavas, keep your chin up!

I see that our friend, Eric Rosenfeld, has put out a release advising that his fund Crescendo Partners has tripped the 10% ownership threshold at Dalsa (DSA:TSX). Welcome to the world of activist investing, Dr. Chamberlain.

As a potential takeover target someday (see prior post “Takeovers to come“, April 15-07), Mr. Rosenfeld may be right to dip his savvy toe in Dalsa’s icy waters. But as a place to go “and shake things up”, Dalsa’s not a great candidate.

To start with, the Chairman and Founder (Dr. Chamberlain) is still very much a presence at Dalsa, and he owns 21.1% of the business. Dr. Chamberlain has already handed the reins over to his operating lieutenant, Brian Doody, so the hedgies won’t be able to call for a management shake-up. One happened last August.

Then there’s the tricky issue of formenting discontent within the ranks of Dalsa’s institutional ownership base. The stock is down 25% over the past year, but I’m not sure that’s a firing offence in light of the Canadian dollar’s impact on so many tech firms. Dalsa has traded in the $6 – $24 range and back again (and back again) for the past several years. It may well be that we’re just touching the bottom of that yo-yo band right now.

According to Dalsa’s last proxy circular, Fidelity owned 12.5% of Dalsa, and Franklin Templeton 10.5%. Unfortunately for Dalsa’s board, Fido has been punting of late, dropping their position to 1.2 million shares (representing a 6.31% stake) according to a report filed on November 12, 2007. It may well be that Fido exited the position completely, when a large 600k block traded in late November.

Most of Fido’s October selling wound up in the account of Howson Tattersall, who reported a 13.8% stake on November 1, 2007.

That means that Mr. Rosenfeld needs to find allies in both Templeton and Bob Tattersall if he wants to make a real push for board control. The fallback, of course, is to try to charm your way into the inner sanctum – the Dalsa boardroom, and work the stock up from the inside. A strategy that Mr. Rosenfeld has performed with much success at Spar, Ad Opt, Sierra Systems Group, etc.

Unfortunately for Mr. Rosenfeld, the Dalsa board may not be all that keen to have him at the helm. Nothing personal, of course, but this board has spent some time real together. Dr. Graham Julien and John Simons have been on the board since 1992 and 1995 respectively. And while four other directors have been appointed since 2003, they own but 53,811 shares among the four of them (0.28% of the total outstanding). More importantly, the evolving strategy at Dalsa has received the stamp of approval of this very board, making it hard to now pooh-pooh the digital cinema strategy that Dalsa has been pursuing for the past couple of years (see prior posts “NBF’s Waterloo Bus Tour turns up some nuggets“, October 16-07 and “Digital Cinema is coming“, April 1-07).

There’s no doubt that the board will be meeting tomorrow to discuss Mr. Rosenfeld’s sudden fancy. And the i-bankers will be pounding the phones and RIMs in the hopes of getting the “defence” advisory mandate.

My advice to Saavas is this: stay cool, and keep your chin up. Which is exactly what he’ll be doing regardless. Engineers don’t build firms like Dalsa without thinking through a raft of big challenges over the years. This development is, believe it or not, just another one of those challenges.

Mr. Rosenfeld’s agenda is generally very straightforward: fix this company up, get the stock price up, sell it to the highest bidder, and move on to the next name. There’s nothing wrong with that, unless the long term prospects of Dalsa are more rosy than the one year share price chart suggests.

That’s for the board and management to figure out. And then convince shareholders that they’re right. In the meantime, he’s not going away…but keep your cool.

MRM