Since he was hired two years ago, Digi International CEO Ron Konezny has received good marks for streamlining the company, jettisoning a business that didn't fit, putting resources behind fast-growing products and widening the operating profit margin.
The stock price at the Minnetonka connected device maker rose from about $7 per share two years ago to more than $12 at times. One analyst moved up his 2017 target price to $17 per share. Now, it's not clear that Konezny and his team will see how things play out as an independent company.
Last month, much-larger Belden Inc., a telecom industry consolidator, made an unsolicited $13.82 per-share offer worth about $380 million. It represented a 20 percent premium to the stock price, which had slipped on concerns about a softer-than-expected short-term revenue outlook.
Digi's board rejected the offer, because, they said, it "undervalues Digi and its future growth prospects."
"Ron has done an awesome job of refocusing Digi," said Ross Johnson, an analyst at Minneapolis-based Riverbridge Partners, a long-term shareholder in the company. "Ron and his team are also in a difficult spot. The board has a fiduciary duty. And the law focuses them on shareholder value. We do not view the purchase offer as adequate, but we understand why they need to look at [this or other offers]."
Belden has indicated that it's open to further discussions to "maximize" shareholder value. It's possible that Belden, known for not overpaying, may make a second offer.
"Digi is a well-respected company with great technology," said Tim Lenze, a Belden executive. "It would be a great addition. We thought our proposal represented a sizable premium and would be of interest to shareholders."
Konezny declined to comment.
"I think Belden wants to get to the table and negotiate and the company doesn't want to sell right now," said analyst Mike Walkley of Canaccord Genuity, who has a $17 price target on the company. "Ron is doing a good job. And I think the board would like to leave him to execute.
"But at some point if Belden would make a higher offer or somebody else does, the board would have to consider it."
Digi reported $203 million in revenue in its fiscal year ended Sept. 30, flat with 2015. Regardless, investors appreciate that income from continuing operations was $13.5 million in fiscal 2016, or 51 cents per share, compared with $9.4 million, or 37 cents per diluted share, in the previous year.
The higher profitability comes from Konezny's gradual shift toward higher-margin, higher-growth products delivered through a streamlined pipeline.
Digi's board let go Konezny's longtime predecessor when a $20.5 million acquisition called Etherios didn't work out very well. Konezny sold it for $9 million.
Konezny said last year that the sale allowed Digi to focus on its core business of "machine-to-machine" and Internet of Things connectivity for thousands of customers. They range from Honeywell devices to the Northern Indiana Commuter Transportation District to Rocky Mountain Energy, which uses Digi Connect Tank, a cellular-enabled remote access sensor that ensures diesel tanks have plenty of fuel.
In November, Digi announced it was buying Pittsburgh start-up FreshTemp, which helps simplify restaurant tasks.
Konezny accelerated the company's drive into wireless modules that can be used to hook up almost anything to the internet. Digi is considered a good fit inside St. Louis-based Belden because Belden makes signal-transmission networks that connect to device-monitoring systems.
Konezny also shifted Digi from customized products to a more narrow portfolio to simplify manufacturing and boost productivity. Konezny, who was paid $797,000 in salary and bonus in 2015, also reduced head count to 515 last year, a decline of about 100, thanks partly to divestitures. And he asked employees to step up the pace.
Earlier this year, Konezny hired a new product chief to streamline the portfolio even more, and a top sales executive to start building business among existing and new customers. More revenue from higher-margin products and related services over a more-efficient organization should result in a bigger, more profitable and valuable company.
Konezny said last month that the company had achieved one goal already of increased profitability.
"We will continue to focus on our three key priorities, which include maintaining a consistently profitable business model, generating revenue growth and [building] a hardware-enabled solutions business," he added.
Digi, which has sales offices and distribution partners around the globe, said it now provides its industry's broadest range of wireless products on a cloud-computing platform tailored for devices and services that help customers get to market fast with wireless devices and applications.
Konezny, 48, has a good track record. He was a founder of Minnetonka-based PeopleNet in 1996, a fleet management software firm that he grew to 250 people before selling to industry consolidator Trimble Navigation of California in 2011. Konezny stayed on to serve as vice president of global transportation and logistics, for Trimble, which employs 1,500 people. He left Trimble in 2014 after deciding against a move to California for family reasons.
Digi appears poised for profitable growth under Konezny. And it likely will take a higher bid by Belden or another acquirer to buy the company's independence.
Neal St. Anthony has been a Star Tribune business columnist and reporter since 1984. He can be contacted at nstanthony@startribune.com.
