Activist fund with a soft touch looks to shake up a wireless company that's lost its way

Lion Point launched on April 1, 2015 as a concentrated credit and equity hedge fund co-founded by Didric Cederholm, formerly of Elliott Associates, and Jim Freeman, formerly of Perry Capital and Elliott. They will pursue strategic and operational activism, nominate directors and take board seats when necessary, but will generally refrain from ultra-confrontational activism.

This has had several adverse effects on the company. First, that division loses $20 to $30 million per year, severely impacting company EBITDA. Second, it took away focus from the core businesses, resulting in a decline in revenue for the wireless modules business. Third, as part of this vision the company aggressively suggested that clients bundle the hardware and software, leading to losses in revenue in the hardware businesses.

The first opportunity here is to fix margins. A small improvement in gross profit margin could be made to get the company back closer to 40% from 30% to 35% today. This could be done by moving away from an internal procurement model to an external procurer with more bargaining power and taking away the procurement forecasting from the sales department who generally overpredict demand. But the main margin improvement will come in operating margins.

Lion Point is well on its way to getting its way, we believe. Although it only has three of 12 directors, there are already directors on the board who we believe would be sympathetic to Lion Point's plan. On March 23rd, the Company added Greg Waters to the Board. Waters was appointed to Mellanox Technologies' board through a settlement with Starboard and although this was after Amoruso left Starboard, Waters certainly understands the value of a plan like this.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio Manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.

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