Here is my impression of what is going on with VSH's recent slide. The co. recently bought into the Chinese market and issued warrants (about 1.5 mill.?) exercisable at $24. The Cina investment, although very impressive*, promised no immediate contribution to earnings. With the collapse of the Asian markets and their respective currencies (which gave AVX, a competitor allied with Kyocera of Japan, an advantage due to the weak yen), you know what the holders of the warrants did, they exercised them. This sort of explains why the stock has bottomed near $24, which to me does not appear to be a mere coincidence. The big traders (the brokerage reports of early 1997, when stock was at 23, predicted a peak of about $32, which was reached 2x in the past year, thereby giving a profitable reason to sell) knew about the warrants, and probably sold out. The warrant issue probably explains the nagging short position of about 1 mil. shares that has existed for the past year (by shorting the stock they were guaranteed a price of about $32 on their warrants). Also, the co. paid a 5% stock dividend recently. As a result, there are lots of additional shares out there to be absorbed by the market, and there was lots of uncertainty, competitive pressures, and the warrants, which have put a cloud over the stock.
*I attended Vsh's annual meeting and to give you an example of the promise of the China venture, the Chinese have a mountain (literally a mountain) of tantalum, which in a pure form is used in passive components. Tantalum passive components represent the hottest sector of the market, thereby explaining why Kemet Corp. rebuffed VSH's takeover attempt. According to Zandman, VSH's CEO, this mountain contained years of worldwide production for tantalum passives (he was not specific but he conveyed that it was a hell of alot of tantalum). This tantalum could be scooped out of the ground rather than drilled and mined. Fortunately for VSH, the Chinese did not know how to refine the tantalum properly, and the product was unusable junk. VSH agreed to lend technological expertise to the Chinese in exchange for a guaranteed portion of the refined tantalum. So VSH will have a competitive advantage in the long-term although the payoff will not come until they get decent quality tantulum out this venture. |
