A Strategic Alternative for Candela

When hedge fund Third Point LLC takes an interest in a company, management takes notice. Investors would do well to do the same.

After the hedge fund's CEO, Daniel Loeb, established an almost 9% stake in Candela (Nasdaq: CLZR) earlier this year, I suspected that it would be time for the aesthetic laser maker to wake up. For too long it has allowed its cosmetic lasers to lose market share to industry rivals like Palomar Medical Technologies (Nasdaq: PMTI) and Cynosure (Nasdaq: CYNO).

An activist investor does not suffer fools lightly, and it seems that Third Point is no longer fooling around with Candela. In a filing with the SEC last week, the hedge fund reported that it had discussed with management "strategic alternatives" for the company. As we know, that's usually a euphemism for putting the company up for sale, but the investor says it didn't suggest or demand any particular course of action.

Apparently Candela's lawyers had a different view of the conversation, because they sent a letter to Third Point saying it had indeed demanded a sale of the laser maker and it was required to file a Schedule 13D with the SEC.

While it's all a bit technical, Third Point's original statement of ownership -- a Schedule 13G -- indicated it was taking a "passive" interest in Candela. That means it wouldn't seek to effect change or influence the control of the company. A 13D, on the other hand, is what an activist investor will file when it wants to stir the pot. Candela is charging that, by discussing strategic alternatives with the CEO and a board member, Third Point changed its position from passive to active and needed to re-file.

The hedge fund disputes that characterization of the conversation, but filed the new form anyway. It's interesting to note, though, that the day after the talks took place, a subsidiary of JPMorgan Chase, an investor that has been steadily acquiring shares, bought another 31,000 shares, giving it an ownership stake of more than 13%. Third Point has also increased its share of the company to just less than 10%.

Regardless of who said what and what was meant by it, Candela is a company that should be considered "in play," whether it's from the laser maker soliciting bids on its own or outsiders making a bid.

With a market cap that's fallen below $170 million, it's only half the size of its nearest rival, Cutera (Nasdaq: CUTR), even though it has trailing revenues of $148.6 million, more than any of its rivals. The closest anyone comes is Palomar, which generated almost $132 million over the past 12 months.

That could make Candela a cheap acquisition target, even in these days of tight credit. The company recently purchased Inolase, a company that manufactures pain reduction technology for laser procedures, which could be paired with a home-based laser device that Candela says is in the works. Procter & Gamble (NYSE: PG), for example, has been inking deals left and right with laser companies for home-based systems from Biolase Technology (Nasdaq: BLTI), Syneron Medical (Nasdaq: ELOS), and Palomar. It might also find the one-two combination in Candela attractive.

At one time, Candela was the innovative leader in the aesthetic laser space. It has long since shed that title as product introductions have been delayed and it failed to meet sales goals and expectations. A large part of the blame needs to be placed at the feet of the company's CEO, who has unfairly built up investor expectations over the years.

With at least one of its large investors talking up "strategic alternatives," Candela might just see its shares get a boost, to the relief of beleaguered shareholders.

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