James Peterson is back in business.
The former chief executive of Aliso Viejo-based Microsemi is looking to shake things up as an activist investor at his new private equity firm, Peterson Capital Group, which has already made one local play and is scouting several others across the country.
“There are three more that we’re doing research on as we speak,” Peterson told the Business Journal in an exclusive interview.
He and many of his top executives were ousted from Microsemi in May after its $10.3 billion sale to Microchip Technology Inc. After the fallout, he decided to bring his Microsemi deals team with him.
The co-founders include David Goren, former legal counsel at the chipmaker, and Rob Adams, who ran business development and investor relations.
“We work well together, and we each have our roles,” Goren said. “Jimmy brings the gut and the business acumen. I work well on the execution side, and Rob brings in all the Wall Street analytical skills.”
The trio knows how to get deals done and closed quickly.
Peterson, who took the helm at Microsemi in 2000 and became board chairman in 2013, oversaw 27 acquisitions and three divestitures during his tenure, the blockbuster sale to Microchip highlighting his run as a dealmaker. He boosted sales from $248 million in 2000 to $1.8 billion in fiscal 2017.
Goren, who joined Microsemi in 2002, and Adams, who arrived in 2007, played big roles in the chipmaker’s roll-up strategy and diversification.
“We’re very well known on the Street,” Adams said.
That’s an understatement.
After Peterson Capital filed with regulators that it would take a stake in Lantronix Inc. (Nasdaq: LTRX), shares of the Irvine-based company rose 20% in the following two trading sessions.
Decades of Expertise
Adams declined to disclose financial details, such as its amount of assets. He did say the venture is “a small private equity fund.”
The co-founders bring decades of expertise to the table.
Peterson cashed out $22.2 million after the Microsemi sale, and Goren took home $17.4 million, according to regulatory filings. Adams has more than $4 million linked to Microchip stock and outstanding payments.
The three did well following the Microsemi sale. While its sale price of $68.78 per share represented only a 7% premium, it was 33% higher than in early January, when analysts first talked up potential suitors.
Peterson Capital’s investment in Lantronix is a 6.4% stake, worth about $3.6 million at the time of the purchase. It’s now worth about twice that.
Lantronix shares have languished for years amid declining revenue, shifting strategies and sunsetting legacy businesses.
“Lantronix seemed like such a perfect company to begin with,” Peterson said. “It certainly needs some assistance.”
Lantronix makes electronic devices and related software that allow clients to remotely monitor equipment, including vending machines, retail terminals and automated teller machines.
After the Peterson announcement and the company’s better-than-expected fourth-quarter results, Lantronix’s shares doubled in August, reaching a high of $6.47 before settling around $5.50 and a $105 million market cap. As recently as 2016, shares traded at 83 cents.
Peterson’s investment “speaks to his confidence in myself and the team and what we can do here,” Lantronix Chief Executive Jeff Benck said. “He’s going to be active and give suggestions to management. I guess what stance he takes is up to him.”
Peterson doesn’t appear to be taking the role of a hostile investor. For one thing, Benck and Peterson have personally known each other for more than a decade.
But Adams signaled the firm has no problem wearing a “black hat” or going hostile if the company isn’t flexible.
Peterson said he likes Lantronix’s potential for revenue growth, saying its nearly $50 million in annual sales is “a beautiful sweet spot.” A Lake Street Capital Markets analyst predicted sales will climb 7.5% this year and 11% next year. It also has $9.6 million in cash and no debt. He said its revenue multiple “is comically low,” though.
The stock was trading only about one times revenue when Peterson Capital invested, below viable profitability. Assuming sustained profitability, share price should be three to five times revenue, Adams said.
Peterson hinted that he knows the strengths of small tech companies better than Wall Street investors.
“It should be known we’ve taken this path for a reason,” he said. “We have a tremendous amount of strengths among the three founding partners and the circle we know.”
Small-Cap Focus
Peterson Capital intends to target smaller cap, publicly-traded companies, Adams said.
“For a small-cap company today, it’s harder and harder to get attention,” he said, pointing to the growing popularity of passive indexes. “With the growth of Blackstone, etc., you’ve seen less and less focus on these microcap types of names.”
The fund’s first targets will be tech-focused, with an emphasis on hardware and software, according to Peterson.
Bought and Ousted
The business venture comes about four months after Peterson, Goren and Adams were ousted from Microsemi by Microchip Technology Chief Executive Steve Sanghi.
A first round of job cuts totaled about 20 and primarily included senior-level executives and vice presidents of various divisions, according to sources with direct knowledge of the layoffs.
Microchip (Nasdaq: MCHP), based in the Phoenix suburb of Chandler, anticipated $300 million in savings in the third year after the transaction’s close. Sanghi, in a conference call with analysts after the close of the deal, signaled that more job cuts and expense reductions were on the horizon.
Microsemi was OC’s fourth-largest chipmaker through April, with about 236 local workers.
Peterson Capital founders are scouting locations across OC for its headquarters, including Aliso Viejo and the Irvine/Newport Beach corridor.
“We’d like to be cozy and pick it out, certainly by the time the fat man is down the chimney,” Peterson said. “We’re getting ready for a new footprint in Orange County.”
