Monday, January 4, 2010

Silicon Storage shareholders push back against management take-under (SSTI)

It was announced on November 13th that memory chipmaker Silicon Storage Technology (SSTI) would go private in a transaction valued at about $200million, or $2.10 per share.  The buyout group would include the CEO and COO, and was met with immediate investor skepticism as undervaluing the company.

The original merger agreement had a 45-day "go-shop" provision, which would entertain offers from other prospective buyers:

"The agreement contains a go-shop provision under which the Strategic Committee, with the assistance of its independent advisors, has the right to solicit proposals or offers with respect to, or that would reasonably be expected to lead to, an acquisition proposal from a third party for a 45 day period beginning on November 13, 2009. SST does not intend to disclose any developments with respect to this solicitation process unless or until the Strategic Committee has made a decision with respect to any proposals or offers it may receive.

"After an extensive review of strategic alternatives with company management and our financial advisors, we determined this all-cash sale of the company with a go-shop provision is in the best interests of the company's shareholders," said Ronald Chwang, chairman of the Strategic Committee.
"We believe that this transaction provides the greatest likelihood of achieving the highest value for the company's shareholders, and that this is also in the best interest of our customers, partners and employees. We believe the added flexibility of being a private company will help us to focus on delivering innovative memory and non-memory solutions to our customers and supporting their needs with the highest levels of service that they have come to expect," said Bing Yeh, co-Founder and Chief Executive Officer of SST."
The "go-shop" provision ended on December 28th, and the company released a report to try and convince people it had actively solicited other bids.  SSTI stock jumped on huge volume in the days following this filing, as investors were likely surprised to the upside to see that the company board was doing a better job of shopping the company than the management buyout group was happy with:
"Pursuant to that certain Agreement and Plan of Merger, between and among Silicon Storage Technology, Inc., or SST, Technology Resources Holdings, Inc. and Technology Resources Merger Sub, Inc., dated November 13, 2009, or the Merger Agreement, SST was permitted until 11:59 p.m. California time on December 28, 2009 to engage in a “go-shop” process. As part of the “go-shop” process, the Strategic Committee of SST’s Board of Directors, with the assistance of independent financial and legal advisors, contacted over 140 prospective buyers, several of whom have been designated by the Strategic Committee as an “Excluded Party” as defined in the Merger Agreement. By designating each party as an Excluded Party, SST is permitted to continue discussions with each of these parties with respect to a non-binding indication of interest submitted by such Excluded Party. Technology Resources Holdings, Inc. has notified the Strategic Committee that it disagrees with the designation of such parties as Excluded Parties under the Merger Agreement."
Maybe it was this window of opportunity that sparked some action from one investor, Riley Investment Management (RIM).  They're out today with a communication to the company's board and other investors, claiming that the bid undervalues the company.  This view is apparently shared by others, as the stock is trading at 2.52, or 20% above the current bid.  The Riley group has branded their effort, calling themselves the SST Full Value Committee:

To make our position perfectly clear, the Committee is deeply concerned with the Board's decision to be acquired by Technology Resources Holdings, Inc. and members of the Company's management team, including the Company's Chairman and Chief Executive Officer and Chief Operating Officer.  The Committee believes the proposed merger consideration is at a significant discount to tangible book value at a time when the semiconductor industry is emerging from a multi-year recession.  In the Committee's opinion, the proposed price to be paid per share is inadequate for shareholders and there are more favorable strategic opportunities available to enhance shareholder value than this ill-conceived transaction that appears to only benefit management.  Among other things, the Committee believes that significantly better value can be realized if the Company focuses on maximizing its lucrative licensing stream while simultaneously minimizing the losses in its products business.  
The Committee urges the Board to immediately reconsider its decision to move forward with the Merger Agreement.  If the Board determines to move forward with the Merger Agreement and does not withdraw its proxy materials to solicit shareholder approval, the Committee intends to solicit against the proposed merger and take such other action as it deems necessary to protect the interests of all shareholders.  
The Committee also believes the Company would benefit from the immediate addition of new independent directors who will represent the interests of shareholders, the true owners of the Company, and fully explore all ways to maximize value for all shareholders. We would welcome the opportunity to meet with the Special Committee to discuss our concerns and how the Company intends to address them.

Shareholder lawsuits were filed here and here and here and here and here and here.  Oh and here too - come on law offices of Brian M. Felgoise, you're late to the party! 
As for fair value for SSTI shares?  A look at the balance sheet shows real, tangible assets and investments.  Goodwill comes in at only $11million.  Book value looks to be about $2.61 cents per share.  Pull out the noncash goodwill assets, and the stock trades right at book value of about $2.50.  As the "Full-Value" committee rightly pointed out, the initial $2.10 offer was far too low.  

A look at the income statement shows a somewhat bloated cost structure than could be streamlined in a private setting to unlock further upside in income, and that's before adding back large noncash charges that improve the company's cash flow.  SSTI trades at book value(liquidation value, to some people) despite being cash flow positive - a sign that the shares are undervalued, and part of the reason management attempted to quietly walk away with the company.

It's quite shady for management to attempt to "buy-under" the company with a lowball bid, with a compliant board of directors that will rubber stamp the deal.  That said, investors need to know what kind of CEO and management they're dealing with before buying shares in a company.  The board in this case is being hounded by other shareholders to extract full value for the company.  Cheers to Riley Investment Management for pushing in that direction.
Copyright 2010 AlphaNinja

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