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AXT: an acquisition opportunity?

In the wake of CEO Phil Yin's resignation, analysts suggest that the Californian substrate vendor is an attractive proposition.

Semiconductor substrate and materials supplier AXT ought to be an acquisition target for other companies in the GaAs industry supply chain.

That s according to two analysts reacting to the shock resignation of AXT s CEO, Phil Yin, on March 18.

Richard Shannon from Northland Securities suggests that rival GaAs substrate supplier Freiberger could be the most likely buyer, since the German company and AXT have been fighting for market share over the past couple of years.

Shannon also thinks that an acquisition by epiwafer foundry IQE, AXT s largest customer in 2009, could make sense.

"We think [AXT] is certainly on the radar screen for many potential groups of buyers," Shannon wrote in a report immediately following Yin s departure.

Rusty Cannon, president of RKC Capital, agrees with Shannon that with AXT s total stock market valuation now below the worth of its cash and restricted deposits, it looks like a good time to buy.

"I can t understand why a competitor or private equity [group] wouldn t be foaming at the mouth to buy AXT," Cannon told compoundsemiconductor.net. "You could offer somewhere around book value and get the cash in the bank and the rest of the company for free."

The two analysts also agree that Yin has been pivotal to AXT s recent success, which has seen the company resurrect supply deals with the likes of Skyworks Solutions and RF Micro Devices.

Prior to Yin s appointment in 2005 (see interview feature), these companies - the world s two largest manufacturers of GaAs devices - had not done business with AXT for many years. Yin was seen as spearheading his company s efforts to rebuild these relationships.

"The resignation is a big loss for the company," said Shannon. "Phil Yin was the key driver of its efforts to regain trust and market share with customers."

That said, both Shannon and Cannon feel that AXT s remaining management "“ under the stewardship of CFO Wilson Cheung for the time being "“ will be able to maintain key customer relationships in the near term.

"AXT can continue to take market share," Cannon said. "They have very good momentum, despite the terrible end markets and economy. When things turn around they are set up perfectly."

While the specific reasons for Yin s resignation remain unknown, Shannon suggests that the former CEO may have wanted to take market share aggressively during the downturn, while other members of the AXT board perferred to adopt a more cautious approach.

Shannon also believes that AXT is beginning to emerge from the slump: "The inventory correction is largely complete and near-normal ordering patterns resumed in March."

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