Last month directors at Microsemi Corp. reached a conclusion that some on Wall Street and in Orange County already were thinking: Chief Executive Jim Peterson’s education lie wasn’t worth ousting him over.
For directors and analysts, Peterson’s track record of growing Irvine chipmaker Microsemi outweighed the disruption his firing would have brought.
“He’s a tough negotiator and runs the business well,” said one company watcher who asked not to be named. “He’s got a good track record of driving growth, improving margins and sustaining profitability. If at all possible, the board doesn’t want to get rid of him.”
In reports to clients, some analysts said they see a chance to buy Microsemi’s shares with Peterson staying on after a 45% stock drop since the scandal broke in December.
But keeping Peterson comes at a cost, even if most agree with the decision.
Microsemi, which had a market value of $800 million last week, is under review by the Securities and Exchange Commission to see if Peterson’s denials of allegations he lied about his degrees misled investors.
Most analysts said they don’t see much fallout from the SEC or the Defense Department,a key user of Microsemi chips.
But shareholder lawsuits are almost certain for Microsemi.
“It is entirely possible, perhaps probable, that class action suits will be filed,” Friedman, Billings, Ramsey & Co. analyst Craig Berger wrote in a note to clients.
Microsemi’s directors are aware of the prospect of litigation, according to the company watcher who asked not to be named.
“We’ll have to see if they can stand the pressure,” he said. “They are going to try to ride it out.”
In keeping Peterson, directors handed down a list of penalties to the executive, who is expected to a pay $100,000 and forgo his bonus for the year, among other actions.
In December, an investor alleged Peterson didn’t hold degrees from Brigham Young University as claimed on his official biography.
The investor, San Diego’s Barry Minkow, has a strategy of digging up dirt on executives and companies, shorting their stocks and then going public with his findings and profiting when stocks fall.
Minkow, who held a short position in Microsemi, spent seven years in prison for fraud, embezzlement and other financial crimes after his carpet cleaning company ZZZZ Best collapsed in 1987.
Early on, Peterson had a foot-in-mouth moment when he “categorically denied” misrepresenting the degrees.
Brigham Young and Microsemi’s own investigation later confirmed Peterson didn’t hold degrees from the school in Provo, Utah.
Peterson’s case is a touchy one. Microsemi directors and local technology executives declined to talk about it for this story.
The thinking seems to be that Peterson’s work at Microsemi and his support of local causes outweigh his offense.
In terms of public perception, there are parallels to Henry Samueli, cofounder and technology adviser of Irvine’s Broadcom Corp.
Last year, Samueli pleaded guilty to one felony count of lying to SEC investigators about options backdating at Broadcom. He’s awaiting sentencing pending trials of Broadcom cofounder and former chief executive Henry Nicholas and former financial chief Bill Ruehle.
Samueli’s continued work at Broadcom reflects a general perception,and Broadcom’s own finding,that he played a passing role in the granting of stock options.
Others insist that any role Samueli played in backdated options should be weighed against the $200 million he and wife Susan have given for education, healthcare, religion and other causes.
Broadcom Case
Because of Broadcom’s options issue, a company executive who was fingered by Minkow around the same time as Peterson got harsher treatment than Peterson did.
Broadcom moved quickly to fire former operations executive Vahid Manian after he was said to have falsely claimed he had degrees from the University of California, Irvine.
Observers said Broadcom had no choice but to let Manian go out of a need for squeaky clean management after the options scandal.
“Broadcom had to face down the whole options backdating investigation and scandals with its founders, so it’s definitely under more scrutiny than the much smaller Microsemi,” said the Microsemi watcher who asked not to be named.
Broadcom’s treatment of Manian also differs from how the company handled Samueli, who many regard as the company’s engineering visionary.
“Manian was just one of many high-level business executives at the firm and not the heart and soul of Broadcom, like Samueli,” the analyst said.
Peterson has played a big role at Microsemi after coming to the company by way of an acquisition.
In the 1990s, Peterson ran Garden Grove’s LinFinity Microelectonics Inc., a unit of San Jose-based SymmetriCom Inc. that was sold to Microsemi in 1999 for $24 million.
Peterson ran LinFinity as a division of Microsemi for a while and was promoted to the top spot in 2000.
He’s overseen streamlining, acquisitions and growth.
“We would argue (Peterson) does get the job done when it comes time to putting up improving and impressive financial results at Microsemi,” analyst Berger wrote.
Before Peterson, the nearly 50-year-old company largely followed the ups and downs of government defense spending.
“We wholeheartedly acknowledge and applaud Peterson’s invaluable leadership in effectively recreating a now unrecognizable industry laggard into one of the premier companies in analog semiconductors,” said Rick Schafer, an analyst at Oppenheimer & Co., in a note to clients.
The challenge now for Peterson will be to prove he is worth keeping at a time when sales are slowing. For the 12 months through September, analysts on average forecast a 12% yearly drop in Microsemi’s sales to $514 million.
He’ll also have to work to erase lingering doubts created by the education flap, according to Schafer.
“The board’s finding and decision does little, in the eyes of many investors, to remove the management credibility overhang currently pressuring Microsemi,” he said.
The company said it has plans to put processes in place to ensure that all employees’ educational credentials are legit.
It also plans to amend its internal ethical code with a provision about “misrepresenting credentials” that could result in fines or losing a post.
