O2Micro International Limited: Green Light To Buy (NASDAQ:OIIM)

A private consortium’s planned acquisition of O2Micro International Limited (NASDAQ:OIIM) appears to have the vote necessary to consummate the transaction. There, however, remains the issue whether enough investors will exercise dissenter rights to possibly derail the merger. But based on recent SEC filings and the trading volume of OIIM’s equity since the deal’s announcement, it does not appear the dissenter pool will jeopardize closure. With these two issues seemingly resolved, investors have the potential to reap a ~10.5% return in 1-2 months.

Albeit, there are risks with investing in this planned acquisition given the transaction value and domicile of the parties. Additionally, if the dissenter pool is larger than anticipated, then the deal could fall apart. All things considered, OIIM presents an interesting near-term opportunity for speculative investors. Therefore, this receives a Buy with a $4.93/ADS.

Financial Terms

On September 30, 2022, OIIM agreed to be acquired for $5/ADS, in cash (before 7¢ in fees), by a group composed of OIIM’s chairman and CEO as well as its CFO and Forebright Capital, a Chinese private-equity firm. Forebright is a seasoned PE firm with ~$1.5b AUM. The transaction is expected to cost the buyer group ~$125m to close the transaction, but consummation is not conditioned on financing as the parties have both equity and debt commitments in place to satisfy the balance. Regarding the debt commitment, Credit Suisse is underwriting $80m of the transaction value.

Transaction Risks

There are three conditions precedent to the transaction that raise concern. Those are:

• governmental injunction
• shareholder vote
• dissenter pool >10%

Injunction

Governmental injunction is the least worrisome. Currently, there are no lawsuits seeking to enjoin the transaction and, while there is still time, it is unlikely a litigating party would find success at this point in the transaction.

Shareholder Vote

The shareholder vote, scheduled for January 31st, is a bit more concerning considering the buyer group controls only 16.9% of OIIM’s 1,468m S/O. In order to be approved, OIIM needs 2/3rds of shareholders present at the meeting (quorum requires at least a majority of S/O, or 734m shares) to vote in favor of the merger. There are three outside shareholders–Grandeur Peak Global Advisors, DNB Asset Management, and Renaissance Technologies–that control another 27.2% S/O (based on most recent 13-F filings). All three are 13-G filers (Rule 13d-1(b) exemption), meaning they:

acquired [OIIM] in the ordinary course of [] business and not with the purpose nor with the effect of changing or influencing the control of the issuer, nor in connection with or as a participant in any transaction having such purpose or effect[.]

Moreover, each of the three firms took an initial position in OIIM significantly below the buyout price. So, assuming the three largest shareholders vote in favor of the buyout, that is ~44% S/O. Depending on how many shares end up being present, OIIM may already have enough votes to approve the transaction. Therefore, it is likely that OIIM will secure the vote.

Dissenter Group

This brings the discussion to the effect potential dissenters may have on the transaction. Section 238 appraisal litigation has become a contentious sticking point in Chinese take-private transactions. In order to mitigate potentially higher transaction costs, some consortiums seek limited dissenter pool clauses in order to deter shareholders from exercising their rights. Because only 16.9% of OIIM’s S/O are guaranteed not to exercise dissenter rights, this condition is the primary fear driving the arb spread.

Using recent 13-F filings (9/30/22) as a proxy, it is within reason to suppose the dissenter pool will not be sufficiently large enough to derail the merger. Currently, if more than 10% S/O (147m shares, or 2.94m ADS) exercise dissenter rights, the buyer group may cancel the transaction. Recall, the transaction value is only ~$125m (after taking into account the buyer groups 16.9% rollover shares). Assuming the three largest outside shareholders (27.2%) will not dissent, there appears to be no other shareholders with reasonably large enough stakes to exceed the conditional threshold. The only other mentionable 13-F filers reporting OIIM stakes were White Pine Capital and Eidelman Virant, combining for 2.7% S/O. But based on their respective firm principles, it is highly unlikely the former would even be interested entangling in appraisal litigation. (Bear in mind, 13-F filings do not account for high net worth individuals and positions may have changed since the last 13-F filings as parties have bought and sold since.)

In addition to the lack of institutional ownership, OIIM’s limited trading volume makes it difficult for potential dissenter specialists to accumulate shares in a meaningful way. OIIM has an average 30-day trading volume of ~60,400 ADS (~$270k market value) and that volume has been fairly consistent just before the acquisition announcement and thereafter:

There could have been heavy buying from arbs in the wake of the announcement, but because trading volume includes both buyers and sellers, it would have been exceptionally challenging for a firm to come in and accumulate meaningful ownership without moving the market. Also, keep in mind, even if dissenters come in above the 10% threshold, the buyer group could still agree to close the transaction.

Ancillary Risks

Investing in China through ADRs has become a risky endeavor over the last several years. Sino-U.S. relations are increasingly strained and there is a lack of transparency at the firm-level making investment in Chinese companies perilous. If things were to go sideways with this deal, it is possible that non-Chinese investors might feel their interests are overlooked, or marginalized at the very minimum, despite a company’s underlying fundamentals. Therefore, OIIM is not recommended as a long-term investment.

If the transaction were to fail, the stock could easily fall back to its pre-announced ~$3/ADS, or 33%.

Also, this position is not for everyone. Due to light trading volume, this opportunity is limited to small portfolios and retail investors.