Can iRobot Survive Red Mountain?
December 29, 2015      

More shareholder value sought

Although some industry pundits have been smiling as of late at the performance of iRobot’s line of Roomba robot vacuum cleaners in the marketplace, a vocal shareholder, Red Mountain Capital, is “deeply concerned” with that same level of performance.

iRobot’s (NASDAQ:IRBT) current valuation of $925 million understates the company’s growth potential, said Seeking Alpha. “With an addressable market of approximately $8 billion (and rapidly growing) in the robotic vacuum market alone, iRobot has an enormous opportunity ahead of it,” it said.

With the company “focusing on many new technologies, such as an autonomous lawnmower, the company will likely broaden its markets significantly moving forward,” according to Seeking Alpha.

“While its home robotics segment will continue to dominate sales for the foreseeable future, iRobot will likely make major inroads into other promising markets with its increasingly sophisticated technologies,” it added.

Quite on the other hand, for Willem Mesdag’s Red Mountain Capital, it’s way not enough. Holding 6.2% of iRobot’s shares (worth $51.9 million), Red Mountain sees the same marketplace ahead for iRobot, yet doesn’t see enough shareholder value coming from it.

Shareholder value is very important because Instead of collecting fees for advice and financing transactions, Red Mountain is rewarded only when the stock prices of its portfolio companies rise, enabling the fund to sell at a profit, explained Mesdag in a Barron’s interview.

“We’re really operating like investment bankers for our portfolio companies, helping out small- and medium-sized companies that have great business models with their capital needs and a few other things that will help them move on to the next level.”

On Dec. 1, Red Mountain took two actions very important to iRobot: in a regulatory filing, Red Mountain disclosed that it had upped its shares in iRobot from 5% to 6.2% and sent a letter to iRobot CEO Colin Angle saying that it was “deeply concerned about the underperformance of iRobot’s stock price over the past year and since the company’s initial public offering 10 years ago.”

Red Mountain makes demands

Red Mountain’s letter contained these two iRobot performance charts, or, as Red Mountain claimed, “underperformance.”

The letter was curt and to the point. It suggested that iRobot do the following:

  1. Focus on its core home/consumer robot business
  2. Explore “strategic alternatives” for its defense/security robot business\
  3. Discontinue its remote presence robot business
  4. Explore a $100 million buyback (through a Dutch tender offer)
  5. Declare a regular dividend
  6. Most explosively, explore a sale of the company.

That’s a tall and uncomfortable order, but some of which iRobot had already committed to during its Analysts’ Day on Nov. 10, noted the Red Mountain letter.

However, on Nov. 11, iRobot seemed to change again, which the letter to iRobot also addressed: “We were disappointed to hear that you will de-emphasize, but still maintain, your commitment to the defense and security and remote presence businesses.”

“This substantially undermines your stated objectives, and fails to address the earnings drag of these two money-losing divisions and the business complexity and management distraction they introduce into iRobot?s business model,” the letter stated.

With a nod toward Red Mountain, iRobot said it that it would buy back $1 million worth of its shares and that it might purchase “up to 1 million shares of iRobot common stock beginning January 4, 2016 through December 31, 2016.”

Where to now for iRobot?

The vacuum market is steadily growing towards $8 billion, and the likes of Ecovacs (China’s robot vacuum king) have sold $47 million worth during China’s Singles Day. In addition, there’s stiff competition on the rise from giants like LG and Samsung. As a result, getting as much market share as possible and gathering up the revenue while the getting is good seems prudent.

Then too, iRobot is IP rich, with 238 patents in the U.S. and 400 worldwide, plus decades of expertise in robotics: two of the original founders of iRobot went on to create other robotics companies, namely Rethink Robotics and CyPhy Works.

Its first employee and co-creator of the Roomba, Joe Jones, co-founded two robotics companies, Harvest Automation and Franklin Robotics.

Through iRobot passes a rich eluvium that inures to the benefit of robotics in all of its forms. How best should it serve both investor and technology? Should it be diverted in a single direction? Can iRobot survive the challenge?