Trident Microsystems Inc (NASDAQ:TRID) is an undervalued net cash stock looking for a catalyst. We think it’s a good candidate for an activist campaign for a number of reasons:
- It’s large for a net cash stock: As its $1.67 close yesterday, the company has a market capitalization of $103M. That puts it into the strike zone for funds with around $100M under management.
- It’s deeply undervalued: We estimate its liquidation value is around $170M or $2.75 per share, which is 65% higher than its close yesterday.
- Its value is predominantly cash: TRID is trading at two-thirds of its net cash value of approximately $155M or $2.50 per share.
- Its stock is liquid enough: According to TRID’s Google Finance page, the average volume for the stock is more than 500,000 shares per day. It traded more than 350,000 yesterday. With 62M shares on issue, an investor seeking ~5% of TRID needs a few more than 3M shares, which should be readily achievable in a reasonably short period of time.
About TRID
TRID develops and markets integrated circuits for digital televisions, LCD televisions and digital set-top boxes. The company’s investor relations page is here.
The value proposition
TRID has an embarrassment of riches on its balance sheet (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):
There are no off-balance sheet arrangements and its contractual obligations are only $15M, including $2.7M in operating leases and $12.3M in purchase obligations.
TRID’s most recent 10Q makes for interesting reading:
Shareholder Derivative Litigation
Trident has been named as a nominal defendant in several purported shareholder derivative lawsuits concerning the granting of stock options. The federal court cases have been consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. A case also has been filed in State court, Limke v. Lin et al., No. 1:07-CV-080390. Plaintiffs in all cases allege that certain of the Company’s current or former officers and directors caused it to grant options at less than fair market value, contrary to its public statements (including its financial statements); and that as a result those officers and directors are liable to the Company. No particular amount of damages has been alleged, and by the nature of the lawsuit no damages will be alleged against the Company. The Board of Directors has appointed a Special Litigation Committee (“SLC”) composed solely of independent directors to review and manage any claims that the Company may have relating to the stock option grant practices investigated by the Special Committee. The scope of the SLC’s authority includes the claims asserted in the derivative actions. In federal court, Trident has moved to stay the case pending the assessment by the SLC that was formed to consider nominal plaintiffs’ claims. In State court, Trident moved to stay the case in deference to the federal lawsuit, and the parties have agreed, with the Court’s approval, to take that motion off of the Court’s calendar to await the assessment of the SLC. The Company cannot predict whether these actions are likely to result in any material recovery by or expense to, Trident. The Company expects to continue to incur legal fees in responding to these lawsuits, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations.
Regulatory Actions
The Department of Justice (“DOJ”) is currently conducting an investigation of the Company in connection with its investigation into its stock option grant practices and related issues, and the Company is subject to a subpoena from the DOJ. The Company is also subject to a formal investigation by the SEC on the same issues. The Company has been cooperating with, and continues to cooperate with, inquiries from the SEC and DOJ investigations. In addition, the Company has received an inquiry from the Internal Revenue Service to which it has responded. The Company is unable to predict what consequences, if any, that any investigation by any regulatory agency may have on it. Any regulatory investigation could result in substantial legal and accounting expenses, divert management’s attention from other business concerns and harm the Company’s business. If a regulatory agency were to commence civil or criminal action against the Company, it is possible that the Company could be required to pay significant penalties and/or fines and could become subject to administrative or court orders, and could result in civil or criminal sanctions against certain of its former officers, directors and/or employees and might result in such sanctions against the Company and/or its current officers, directors and/or employees. Any regulatory action could result in the filing of additional restatements of the Company’s prior financial statements or require that the Company take other actions. If the Company is subject to an adverse finding resulting from the SEC and DOJ investigations, it could be required to pay damages or penalties or have other remedies imposed upon it. The period of time necessary to resolve the investigation by the DOJ and the investigation from the SEC is uncertain, and these matters could require significant management and financial resources which could otherwise be devoted to the operation of its business. In addition, the Company’s 401(k) plan and its administration were audited by the Department of Labor but no further action was noted.
The catalyst?
None. There are no activist investors in this stock and management seems intent on helping itself to large portions of options and restricted stock. Rather than pay dividends to long-suffering stockholders, they’ll retain the earnings in the faint hope it’ll pump up the stock price, which helps with their options. The company could comfortably pay a special dividend of around $3 per share and still leave $43M of cash in the bank.
Conclusion
TRID is another perennial inclusion on the lists of net net stocks. Even though it’s deeply undervalued, without a catalyst it seems destined to remain that way. We’ll keep an eye on its filings and let you know if anyone takes it on.
TRID closed yesterday at $1.67.
The S&P500 Index closed yesterday at 805.22.
[Full Disclosure: We do not have a holding in TRID. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
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