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Corning Goes Activist on Itself With Samsung Deal

Michael Santoli

The Street is cheering Corning Inc. (GLW) on Wednesday, lifting shares more than 13% to above $17 on news it will take control of its LCD joint venture with Samsung Electronics Co., which in turn will make investments that give the South Korean electronics giant an effective 7.4% stake in Corning.

A venerable, patient company, Corning has operated at the pace of scientific inquiry for 160 years. With its deals struck with Samsung, Corning has shown it is also capable of moving to the quicker rhythms demanded by Wall Street.

Samsung’s $2.3 billion financial investment in convertible preferred shares implicitly values Corning on paper at $31 billion, some 25% above its current market value. The deal also liberates close to $2 billion in cash that sits at the joint venture, which Corning will use to repurchase more shares, and comes along with a 10-year LCD glass-supply agreement, signaling a greater role for Corning in developing future Samsung products. The venture also supplies high-tech glass for such device makers as Apple Inc. (AAPL) and Sony Corp. (SNE).

A win-win deal

In striking what appears to be a win-win, shareholder-friendly deal, Corning has effectively done for itself much of what an activist investor might have agitated for. Corning was among four companies cited here recently as potential targets of activist shareholders, based on heavy cash holdings, sleepy or underperforming stocks and the prospect of dramatic corporate restructurings. The company was also among the “Old Tech” stocks that appeared to present a good mix of value and growth early this year.

S&P Capital IQ analyst Robert Dezego Wednesday upgraded Corning stock to a Buy from Hold, and raised his stock-price target to $21 from $15, noting the benefits of the Samsung deal including “a stronger balance sheet, cost synergies, [earnings-per-share] accretion, EPS visibility with a 10-year supply agreement, lower capex, and a solid strategic investor.” He adds that Corning’s “core results are improving and a new $2 billion stock buyback should offset deal dilution.”

Other investors are suggesting that Corning is now on the path to earn $2 a share by 2015, up from an expected $1.26 this year – a level that would certainly warrant a stock price somewhat above $20, given prevailing price-to-earnings multiples for mature technology companies. The stock traded close to $19 in after-hours action Tuesday after the Samsung news broke, but has lost some momentum in the session as the broad market has been under profit-taking pressure.

Still a target?

Whether the latest transactions alone can free Corning from the influence of an opinionated outside investor will depend on whether its shares can continue climbing toward rising estimates of their fair value.

In some respects, Corning continues to have some of the attributes of a potential activist target. Aside from an inexpensive stock and over-capitalized balance sheet, the company has five discrete business lines and a separate Dow Corning joint venture that makes silicone products.

The company is exceedingly proud of its innovation heritage and has successfully reinvented itself several times. It used to make colored signal lights for railroads in the 19th century, created Pyrex and TV tubes, and rode the fiber-optic boom of the 1990s to become one of the hottest stocks in the Internet bubble.

While certainly considered a well-managed company, Corning relishes its luminous history and is outwardly proud of the broad-minded patronage of its rural upstate New York community. These are admirable corporate priorities, though to some mercenary investors Corning might seem to be insufficiently focused on maximizing near-term shareholder value.

Interestingly, Corning might be up for a fight if it ever comes down to it. In detailing its corporate values on its website, the company states: "Corning cherishes — and will defend — its corporate freedom. That independence is our historic foundation. It fosters the innovation and initiative that has made our company great, and will continue to provide inspiration and energy to all parts of our network in the future."

The intriguing thing about sifting for possible activist targets is that they can often be attractive to own even if a wave-making professional investor never arrives on the scene. Good value for a strong business within a company that has a lot of options to do deals and free up capital – that’s a recipe for a pretty good investment, even if all its shareholders remain friendly.