LanOptics Raising Stake In EZChip - A Bullish Sign

If I were a casual visitor to Wall Street, I would rush out and buy LanOptics (Nasdaq: LNOP). Why? Because things are happening there that are typical of the lull that precedes the next round of gains.

LanOptics announced last week that it would increase its stake in its subsidiary EZchip Technologies to 78% from 60%. This is another step towards the acquisition in full of EZchip by LanOptics, as previously agreed by its various shareholders back in 2003. What is actually happening is that EZchip investors are exchanging their shares for those of its parent.

EZchip, which develops and manufactures advanced network processors that are said to represent the high-end of these technologies, is LanOptic’s sole asset and it may well be that the stock swap is a technical transaction only, in order to, as LanOptics put it, “rationalize corporate structure by unifying the shareholdings in the two companies.” On the other hand, many people will interpret this move as a sign of an imminent breakthrough business-wise, and that they would therefore be better off with LanOptic’s marketable shares rather than the non-marketable ones of EZchip.

LanOptics is classic example of the chasm between Wall Street and Main Street that I am constantly referring to. In LanOptics’ case one of those involved is leading technology guru George Gilder. He believes in the product and the company, which he recommends at every opportunity. The trouble is that he has been waxing enthusiastic since the turn of the century, and the breakthrough has yet to come.

LanOptics slipped from $10 at the beginning of 2002 to $4 a year later. By the beginning of 2004 it had rallied to $11, and then fell to $5 in July, only to climb back up to $15 by the end of the year. By November 2005 it was back down at $5, rising to $10 in May 2006, and then slipping again to $7, following which it rallied once more to its current price ($14.26 at the close of trading yesterday).

A right old yo yo on Wall Street combined with steady progress on Main Street. This is what classics are made of.

LNOP 3-yr chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

Comments

[AngeloGeorge]

I have a long position and have been trading LNOP (always long NEVER SHORT) for many years. 2007 will be a banner year for LNOP or EZchip which ever name they select when the aquisition has been completed.
This is the ground floor of a dramatically improved technology in high need & future high demand.
IMHO
Merry Christmas

[schmitt]

This makes no sense. Existing LNOP shareholders are diluted and you think this is good? Sure it's good! Good for the EZ-Chip investors with an illiquid share who now have access to capital markets!

What is going to happen if all these new shareholders start cascading their liquidity into the market! You can't tell me they are not going to sell- otherwise why would they agree to the swap! What sort of lockup agreements are in place?

This is a meaningless event unless you examine the cost of issuing new shares and compare that against your expected performance of the company.

What am I missing here?

[AngeloGeorge]

Mr. Schmitt:
You are missing and overlooking the fact that the process has a precedent. In 2002 with Apex partners and again in 2005 with IBM,Tamar VCs & others, none of which produced any marked impact on the trading values of LNOP. These VCs are funding with a 10 to 1 appreciation expectation.
You also need to know that there are selling restriction in place. As I understand it to be true, 1/3 cannot be sold for 180 days; 1/3 cannot be sold for 90 days; the remainder may be sold at will.

All these investors are pretty savy traders in their own right, If they had little or no confidence in the future of EZchip, would they be where they are?

[AngeloGeorge]

Price behavior in anticipation of Financials due to release in the next few weeks, plus the Roth Conference February 19th spells the beginning of the next leg of the run begun in mid 2006.

The train may have left the station but it is now only at the 1st stop of a long ride to come. IMHO!
I have a long position.

[AngeloGeorge]

With 6 consecutive quarterly revenue increases in excess of 100% quarter to quarter, can this train possibly stall? I don't think so.
Sooner or later the market will awaken to this issue.