By Kingsley Park Capital -Disclosure: I am long ADNC.
Yesterday, May 7th, ADNC's CFO Kevin Palatnik bought 25,000 shares, worth $350,000. This is after a previous 50,000 share purchase on March 7th. In total, he has purchased more than $1 million worth of stock in the last two months. This is eye-opening for a CFO with a $300k salary. In all of our time following the market, we have never before seen an insider make a personal bet of this magnitude.
In light of the earnings disappointment following Mr. Palatnik's substantial purchase in March, it is unlikely that he has been buying shares on the prospect of ADNC outperforming as a standalone entity. Instead, Mr. Palatnik most likely believes that ADNC will be acquired significantly above today's prices.
ADNC's circumstances alone make an acquisition likely in the long term. However, Mr. Palatnik's continued insider purchases alter the prospect of a sale from a reasonably likely eventual outcome to highly likely in the medium term.
ADNC makes voice processors that are in several top devices, including Samsung's (SSLNF.PK) S3 and S4 as well as Google's (GOOG) Nexus 10. A full list of the devices that use ADNC's technology is available here. ADNC's voice processors improve sound quality by distinguishing between the speaker's voice and ambient noise. As the leader in the space, ADNC is in an enviable position. The company's technology has significantly outperformed comparables from the likes of Apple (AAPL), Qualcomm (QCOM), and others. Without ADNC, there would have been no Siri for the iPhone.
ADNC's technology could be a compelling strategic play for potential buyers. The companies in this space compete fiercely and voice quality is becoming increasingly crucial to differentiate. Qualcomm's Fluence product has been losing market share to Audience and the company certainly has the means to make a defensive acquisition. Other high profile potential buyers include Google and Samsung, both of whom already use ADNC's technology in key products.
The unusually high VC ownership in ADNC is another strong indicator of a likely medium-term acquisition. A large VC ownership stake typically indicates a higher-than-normal probability for a buyout, as VCs are incentivized to cash out to return profits to their LPs. In the case of ADNC, more than 54% of the company is held by VC funds including New Enterprise Associates (21.0%), Paul Allen's Vulcan Capital (17.6%), and Tallwood (15.7%).
ADNC has strategic importance to enormous tech companies, sizeable cash, a fast growth rate, and VC backing. These circumstances alone would make the company a highly likely buyout target on its own merit. The continued buying of ADNC's CFO in quantities larger than his annual salary makes this a rare opportunity.
The only question remaining is what a reasonable valuation range for a buyout would be. Companies of this nature are typically bought out for a multiple of sales. Given its high growth profile and strategic importance, a buyout of ADNC would likely be in the 2x-5x sales range (Qualcomm has higher margins but much slower growth and trades around 5x sales). To us, the upper end of this range seems reasonable given Audience's compelling IP.
What's clear is that such a buyout would be at a substantial premium to today's price. Using a conservative 2x sales valuation and consensus 2013 sales forecasts of $180 million, ADNC could be acquired for $360 million + $124 million of cash and marketable securities, or $20.77/share using 23.3 million fully diluted shares.
ADNC is growing quickly and we like the company's fundamentals. However, in the interest of expediency, we have not discussed them in depth here. If you are interested in this information, feel free to reach out directly or leave a comment.
Source: seekingalpha.com
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