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Archive for November, 2011

Amit Chokshi of Kinnaras Capital, an independent registered investment advisor focused on deep-value, small capitalization and micro capitalization equity investing, has contributed a guest post on Imation Corp (NYSE:IMN).

About Kinnaras:

Kinnaras aims to deliver above average long-term results through application of a deep value investment strategy.  As a result, the Firm focuses on the “throwaways” of the equity market, or stocks that are generally viewed as broken from a fundamental standpoint.  The Firm utilizes a fundamental, bottom-up, research-intensive approach to security selection, focusing mainly on prospects trading below book and/or tangible book value or cheap price to free cash flow. Kinnaras is a strong advocate of mean reversion and has found that pessimistic valuations, and thus attractive investment opportunities, often manifest when the broader investment community disregards mean reversion and impounds overly pessimistic expectations into security prices.  When valuation incorporates these pessimistic assumptions, the risk/reward scenario favors the investor.

Imation Worth More Sold Than Alone

As a deep value investor, one is always confronted with companies that have potentially great assets but can be overshadowed by poor management.  As a deep value investor, often times a great stock is not necessarily a great company but the overall value available from an investment standpoint is too attractive to pass up.  Based on its current valuation, IMN appears to fall into this category.

IMN is a global developer and marketer of branded storage/recording products focused on optical media, magnetic tape media, flash and hard drive products and consumer electronic products.  The company has significant global scale and its brand portfolio includes the Imation, Memorex, and XtremeMac brands.  The company is also the exclusive licensee of the TDK Life on Record brand.

IMN has high brand recognition and is a leader in its key categories of optical and magnetic tape media.  While the company faces long term secular challenges with regards to how data is stored, the current valuation appears to be highly muted due to a number of strategic and capital allocation blunders over the company’s past 5+ years.  Management would be doing shareholders a greater service by simply putting the company up for sale given the time allotted for a number of strategic moves to play out unsuccessfully in recent years.  Moreover, IMN has been on an acquisition spree in 2011 and existing shareholders may see further value destruction given the track record of management.  The following highlights some key grievances shareholders should have with IMN’s current strategy

Horrific Capital Allocation by Management: IMN’s cash balance serves as somewhat of a fundamental backstop against permanent capital loss.  The problem, however, is that the company’s net cash balance has been used to fund a number of bad decisions, particularly M&A.  Management has acquired a number of businesses in recent years, none of which have benefited shareholders.  These acquisitions of businesses and intellectual property (“IP”) have led to clear value destruction as evidenced by IMN’s sales and operating income performance since those acquisitions along with on going write-offs of goodwill tied to a number of those purchases and constant restructuring charges eating into book equity.

One example of how poor management’s acquisition strategy was its purchase of BeCompliant Corporation (Encryptx) on February 28, 2011 which resulted in $1.6MM in goodwill.  In less than five weeks, IMN had determined the goodwill tied to this acquisition to be fully impaired!  While $1.6MM is a tiny amount, Table I highlights the total value of goodwill written off by IMN in recent years along with the ongoing restructuring charges in the context of the company’s historical acquisition capex.

TABLE I: IMN ACQUISITION CAPEX & IMPAIRMENT, RESTRUCTURING CHARGES ($MM) [Click to expand]

Since 2006, IMN management has deployed $442MM in cash to acquire a variety of businesses.  Since that time, investors have had to experience $152MM in goodwill write-offs and another $169MM in restructuring charges as IMN fumbles in regards to integrating newly acquired and existing business segments for a grand total of $320MM in charges since 2006.  IMN management is clearly a poor steward of capital.   What’s worse is that shareholders experienced value destruction at the expense of exercises which would have returned cash to shareholders.

For example, after 2007 IMN ceased paying a dividend.  The annual dividend returned over $20MM to investors annually.  Rather than provide investors with a certain return in the form of a dividend, IMN management has used that capital to obviously overpay for businesses such as Encryptx.  Another demonstration of poor capital allocation by management is its stock buyback history.  From 2005-2008, IMN spent nearly $190MM to buyback shares when its stock was valued at levels ranging from 0.4-1.1x P/S and 0.8-1.6x P/B or $14-$48 per share.  The average acquired share price of IMN’s treasury stock was $23.39.

Since 2008, IMN’s share price has ranged from its recent multi year low of $5.40 to about $14 (for a brief period in early 2009).  More importantly, IMN’s valuation has ranged from 0.15-0.25 P/S and 0.28-0.36 P/B.  So while IMN has had more than enough cash to purchase shares since that time, from 2009 on, IMN management decided to repurchase just under $10MM of stock.  This exemplifies management’s history of overpaying for assets – whether it’s businesses, IP, or the company’s own shares.

Management has no meaningful investment in IMN:  There has been considerable insider purchases since July 2011 across a number of companies.  IMN has had no major inside purchases despite the current low share price.  IMN CEO made an immaterial purchase in the open market very recently but overall, while  IMN stock has floundered, management has experienced none of the setbacks of shareholders for its inept strategy.  As mentioned above, management had the company execute on a number of buybacks from 2005-2008.  However, the overall effect of those buybacks were considerably offset by significant issuance of stock compensation.  As a result, IMN’s overall share count continued to grow despite these share buybacks.  In summary, management has demonstrated little appetite for the company’s shares, irrespective of valuation, while expecting shareholders to sit idly by while it awards itself dilutive stock compensation off the backs of investors.

There is no question that IMN has its share of challenges but is there value to be unlocked?  At current valuations, it appears that significant upside is potentially available if IMN investors can take an activist stance.  Management has had its chances for many years and it is clearly time to explore other options.  Despite the secular challenges IMN faces, the company is still worth more than current prices.  The following highlights the good aspects of IMN.

Valuation:  IMN is cheap based on a number of valuation metrics.  First, at $5.81 per share as of Monday’s (11/28/11) market close, IMN has a negative enterprise value.  IMN has $6.21 in net cash per share and the current share price means that the market is ascribing a negative value to IMN’s core operating business.  Given the number of patents and intellectual property along with a business that can generally crank out solid cash flow, IMN’s main businesses should not have a negative value despite the longer term secular challenges it faces.  On a capital return basis, IMN management should have the company repurchase shares at this level but that may be expecting far too much from management given its track record.

IMN is also trading at valuation levels below those reached even in 2008-09.  As Table II shows, IMN has not traded at levels this low at least since 2003.  Long-term challenges in its core business segments along with value destroying management are two reasons for these metrics grinding lower but at a certain point, valuation can become rather compelling.  I think current prices and valuation may reflect “highly compelling” from an investment standpoint.

TABLE II: IMN HISTORICAL VALUATION [Click to expand]

IMN’s current valuation could be ascribed to a company with major near-term problems, typical of those that burn considerable cash and have poor balance sheets characterized by high levels of debt and/or near-term refinancings.  IMN does not fit into this description.  As bad as IMN is performing, it is still on track for a positive free cash flow in 2011.  IMN has modest capital expenditure needs and IMN’s gross margins have been increasing in 2011, approaching gross margins realized in 2007.  Table III presents my estimate for FY 2011 excluding IMN’s non-cash restructuring charges and write-offs.  To be clear, a potential acquirer would also use pro forma statements in determining IMN’s value.

TABLE III: IMN 2011 SUMMARY OPERATING DATA

Using a highly conservative multiple of just 3.0x 2011 pro forma EBITDA of $49MM leads to a share price of $10.  What is clear from Table III is that if management could avoid squandering capital on acquisitions, IMN can still generate attractive free cash flow.  In addition, with a net cash balance of $233MM or $6.21/share, IMN should not generally be paying any net interest expense if that capital was better managed/allocated for cash management purposes.  A history of poor capital allocation and strategic blunders has led to IMN carrying a heavily discounted valuation.  At about $5.80, a case could be made that IMN is trading at or below liquidation value as presented in Table IV.

TABLE IV: IMN LIQUIDATION VALUE PER SHARE

Table IV shows that the major wildcard is really the value of IMN’s intangible assets.  While IMN is facing secular challenges, the IP it carries could very well have value to a potential acquirer, especially at an attractive valuation.  IMN maintains a long-term exclusive license with TDK which expires in 2032.  TDK, which owns nearly 20% of IMN, could bless a sale that allows those licenses to pass on to an acquiring company.  Aside from the TDK license, IMN holds over 275 patents.  IMN has recently entered into security focused technology for the purposes of flash and hard drive storage.  This technology uses various advanced password/encryption technology along with biometric authentication and could very well be worth much more to a larger technology company that could more broadly exploit this IP across its technology.  This is just one example of various IP IMN possesses.  In addition, IMN has leading market share and brand recognition/value in a number of areas such as optical media along with magnetic tape media.  A competitor like Sony Corp (“SNE”) or a client like IBM or Oracle (“ORCL”), both of which use IMN’s magnetic tape media in their own products for disaster storage/recovery and archiving, could find IMN’s IP of value.

TABLE V: IMN LIQUIDATION VALUE BASED ON INTANGIBLE ASSET DISCOUNT

If IMN’s IP and thus its intangible assets are absolutely worthless, IMN would be worth under $2 in a fire sale liquidation.  However, at even a 50% haircut of IP, IMN gets to where its stock is currently trading.  The less severe the discount, the more IMN is worth in a liquidation.  That’s hardly a groundbreaking statement but what if IMN’s IP is actually worth more than its carrying value?

TABLE VI: IMN LIQUIDATION VALUE BASED ON INTANGIBLE ASSET PREMIUM

What is clear is that IP has considerable value and in many cases eclipses the actual on-going business value of a number of companies.  The recent lawsuit between Micron Technology (“MU”) and Rambus Inc (“RMBS”) was for IP claims that could have yielded nearly $4B in royalties (before potentially tripling under California law) for RMBS. RMBS commanded a market valuation of roughly$2B before MU won the lawsuit.

Motorola Mobility Holdings (“MMI”) faced very challenging headwinds in the mobile device space against tough competitors such as Apple (“AAPL”), Samsung, HTC, and others.  This was reflected in the stock losing significant value once being spun off from Motorola (about 25% from its initial spin-off price).  Nonetheless, Google (“GOOG”) saw value in MMI’s IP, enough to offer a share price that was essentially 100% above its at-the-time lows.

Eastman Kodak (“EK”) has a number of operating challenges and a far less attractive balance sheet relative to RMBS, MMI, and IMN.  The company is wracking up losses and has a $1.2B pension shortfall.  Nonetheless, IP specialists MDB Capital believe that EK’s IP could be worth $3B in a sale.  EK currently has a market capitalization of just $295MM.

What is clear is that there is a wide range of valuation outcomes dependent on the value of the IP to a potential buyer.  IMN could be an easy and accretive acquisition to a number of large technology firms.  Firms like SNE, Maxell, and Verbatim could find IMN attractive for its leading position in optical media.  SNE could also find IMN’s magnetic storage division of value, as could IBM and ORCL.  IMN’s emerging storage division encompasses USB, hard disk drives, and flash drives (admittedly not really “emerging”) but has a particular focus on security focused applications in this storage format.  The IP related to biometric authentication and advanced encryption could be of value to a number of storage/storage tech companies such as Western Digital Corp (“WDC”), Seagate Technology (“STX”), SanDisk Corp. (“SNDK”), Micron Technology (“MU”). Even larger enterprise storage and software companies such EMC Corp (“EMC”), IBM, and ORCL could find this segment of value.  The small consumer electronics segment could be of interest to a company like Audiovox (“VOXX”).  However, in any case, all of IMN could be acquired at a very attractive price to nearly any large technology firm/buyer.

At a takeout price of just $10 per share, for example, an acquirer would be buying IMN’s core business for just $142MM with $6.21 of the $10 offer represented by IMN’s net cash.  This small deal size could very well lead to a quick payback period for a number of larger firms that could exploit IMN’s IP across multiple channels.  IMN could also be sold off in piecemeal fashion but given its small size and number of large technology companies that can utilize IMN’s IP, folding the entire company at an attractive price could be the easiest road.

Management and the board have had more than enough time in recent years to transform IMN or move it forward.  The operating results clearly show that this strategy is costing shareholders greatly and management appears to have little competence with regards to understanding how best to deploy capital.  Nearly $200MM was spent to repurchase far more expensive IMN shares prior to 2008 while a pittance of IMN capital has been deployed to buyback shares when the stock is trading for less than its net cash value.  In addition, upon ceasing its payment of annual dividend, IMN management has utilized that cash to pursue questionable acquisitions.  These acquisitions have led to destruction of shareholder equity given the subsequent writedowns and constant restructuring charges experienced by IMN.  The bottom line is IMN investors should pursue an activist stance and encourage management and the board to seek a sale for the sake of preserving what value is left in the company.

DISCLOSURE: AUTHOR MANAGES A HEDGE FUND AND MANAGED ACCOUNTS LONG IMN AND MU.

Greenbackd Disclosure: No Position.

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Carl Icahn submitted a bid today for Commercial Metals Company (NYSE:CMC), a manufacturer and recycler of steel and metal products in the United States and internationally. Icahn submitted the bid by letter (set out below), which prompted an odd response from CMC management (also set out below). Icahn’s final response (set out last) to CMC’s press release is vintage Icahn.

Icahn’s bid letter:

CARL C. ICAHN

November 28, 2011

Board of Directors
Commercial Metals Company
6565 North MacArthur Boulevard, Suite 800
Irving, Texas 75039

Ladies and Gentlemen:

I am currently your largest shareholder and beneficially own 9.98% of the outstanding common shares of Commercial Metals Company (the “Company”) through several affiliated entities, including subsidiaries of Icahn Enterprises LP (NYSE: IEP). Based upon publicly available information, Icahn Enterprises (which currently has, on a consolidated basis, $22.4 billion of assets, including in excess of $13 billion in liquid assets, which are cash and marketable securities) hereby proposes to purchase the Company in a merger transaction at $15 per share without any financing or due diligence conditions. That price represents a premium of 31% over the stock’s closing price on November 25, 2011, which was $11.45, and a premium of 72.6% from its low this year on October 3, 2011, which was $8.60.

IEP is prepared to proceed to immediately negotiate and execute definitive documents. We firmly believe that the Board’s fiduciary duties require the Board to allow shareholders to decide for themselves if they wish to accept this offer. Accordingly, we are also prepared to structure the transaction with an immediate front end tender offer, with protections for minority shareholders pending completion of the merger.

This transaction will allow shareholders the opportunity to monetize their investment in the Company. Those who desire to stay invested in this industry could take their proceeds and invest in direct competitors in the steel industry which we believe are much better managed and better situated to take advantage of any possible economic recovery than Commercial Metals.

The reason IEP is paying a 31% premium over the November 25, 2011 closing price is because of IEP’s ownership of PSC Metals Inc. When the acquisition is completed IEP intends to combine Commercial Metals with IEP’s own metals recycling assets. IEP will sell Commercial Metals’ non-core assets and immediately appoint a new management team to run the steel business. In our opinion, these undertakings are imperative to realize future profits at Commercial Metals.

As a 10% shareholder of Commercial Metals we are extremely concerned about the capabilities and behavior of the current Board and management, and therefore, we intend to nominate three individuals as directors at the Company’s 2012 annual meeting of shareholders, as well as make several proposals for shareholder consideration. We do not believe the current Board is capable or willing to undertake the actions necessary to enable Commercial Metals to compete in the future. Such actions include, but are not limited to, the sale of non-core assets, the immediate replacement of management, and the refocusing of the business on core operations in North America. The track record established by the current Board and management team over the last several years is dismal.

Unfortunately, a below average operating performance fueled by a distracting and misguided international growth plan, combined with a disastrous investment record, has become the defining characteristic of Commercial Metals. We have no confidence in management’s ability to continue running the Company, nor do we have any confidence that the Board will ever hold management accountable for poor performance – as shown by the recent and inexplicable bonuses paid to management. But, hopefully,even this Board will finally take its fiduciary duty to shareholders seriously enough to allow shareholders to decide whether or not to sell the Company at a 31% premium over current market price.

Your management team has suggested a recovery in key end markets will not materialize in 2012. Further, in our opinion, because the Company has been so poorly managed, shareholders are exposed not only to cyclical industry risks, but also to permanent risks. Astoundingly, between 2006 and 2011, the Company squandered $2 billion of capital on ill-conceived acquisitions and “growth” projects, many of which generated negative EBITDA through the period.

Despite this dismal record, the Board recently granted bonuses to management, including a $750,000 bonus to the new CEO — for what exactly?! Not in recognition of the Company’s operating performance, but because management threw in the towel and admitted that the Company should walk away from many of the substantial investments that you approved only a few years earlier. The logic is absurd! The Company spends shareholder money on disastrous investments, and then several years later, awards management special bonuses – again shareholder money – for having the “courage” to run away from those very same investments!

Unfortunately, over the next several years even if the steel markets shift into a cyclical recovery, we fear, and believe, that Commercial Metals will simply shift back from the current strategy where management is supposedly focused on unwinding its disastrous investments, to the previous “strategy”, where management travels the world investing in losing “growth” projects from Croatia to Australia.

In light of the above, we again ask you to finally show that even this Board is serious enough about its fiduciary obligations to allow shareholders, and not themselves, to decide whether to sell the Company at a substantial premium over the current market price. We would like to move forward immediately and we are ready to meet. We are prepared to enter immediate negotiations and would like to see a tender offer launched as soon as possible.

Carl C. Icahn

CMC’s press release response:

Commercial Metals Company To Review Unsolicited Letter From Icahn Enterprises LP’s Chairman Carl Icahn

12:46pm EST

Commercial Metals Company confirmed that it has seen an open letter released to the press by Icahn Enterprises LP’s Carl Icahn proposing to acquire all outstanding common shares of Commercial Metals Company at a price of $15.00 per share. Commercial Metals Company’s Board of Directors, in consultation with its independent financial and legal advisers, will review the letter and determine a response that is in the best interests of the Company and its stockholders. The Company noted that Icahn’s letter did not constitute a formal offer and, as such, stockholders do not need to take any action. Goldman, Sachs & Co. is serving as financial adviser, and Sidley Austin LLP is legal adviser.

Icahn’s rejoinder:

CARL C. ICAHN

November 28, 2011

Board of Directors
Commercial Metals Company
6565 North MacArthur Boulevard, Suite 800
Irving, Texas 75039

Ladies and Gentlemen:

We have seen your press release “Commercial Metals Company to Review Unsolicited Letter From Carl Icahn” issued earlier today. You stated in your press release that: “The Company noted that Icahn’s letter did not constitute a formal offer and, as such, stockholders do not need to take any action.” This is absurd and in-keeping with the confused decisions and statements that this management team and Board have made over the past 3 to 4 years. We have no idea why the Board would want to misconstrue what was obviously a formal offer?

We do not want any confusion or misinformation, so let’s reiterate what should have already been clear. The offer we delivered to the Board earlier today is, in all respects and without any doubt, a formal all cash offer to acquire the Company. In fact, we will repeat our offer in order to eliminate the Board’s confusion. Here it is again:

Icahn Enterprises (which currently has, on a consolidated basis, $22.4 billion of assets, including in excess of $13 billion in liquid assets, which are cash and marketable securities) hereby proposes to purchase the Company in a merger transaction at $15 per share without any financing or due diligence conditions.

Given the obvious market interest in your securities, as evidenced by today’s heavy trading volumes, it is incumbent on the Board to respond to our offer as soon as possible.

Carl C. Icahn

Funny stuff.

[No position]

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A small Canadian activist fund is leading a group of disgruntled shareholders in a campaign to break-up Research In Motion Limited (USA) (NASDAQ:RIMM). The activist, Jaguar Financial Corporation, says the group want a sale of the company as a whole or in parts, and the replacement of co-CEOs Mike Lazaridis and Jim Balsillie, RIMM’s two largest shareholders. They are also calling on the board to explore options to sell or spinoff RIMM’s patent portfolio.

The company previously been confronted by an unhappy investor about its governance structure. Northwest and Ethical Investments initially sought a proposal to split the chairman and chief executive roles but dropped it after RIMM said that it would form a committee to “study its leadership structure.”

Jaguar says that it speaks on behalf of shareholders representing 8 percent of the company’s shares. Vic Alboini, Jaguar’s CEO, says there are 13 shareholders in his camp, but he declined to identify them:

There is no collaboration on RIM other than, ‘we support the Jaguar initiative to cause corporate governance change, and to push the company to put itself up for sale or pursue strategic options’.

The distinction is important because a group of shareholders acting together and holding at least 10 percent of shares must disclose its membership.

The September 6 letter from Jaguar is set out below:

Jaguar, On Behalf of Supportive Shareholders, Requests Rim Directors to Commence a Value Maximization Process That May Include the Sale of Rim

TORONTO, Sept. 6, 2011 /CNW/ – Jaguar Financial Corporation (“Jaguar”) (TSX: JFC), a shareholder of Research In Motion Limited (“RIM” or the “Company”), on behalf of itself and other supportive shareholders, today called upon the Directors of RIM to establish and carry out a formal process for the maximization of shareholder value. This value maximization process would include the pursuit of all options including a potential sale of the Company or a monetization of the RIM patent portfolio by a spin-out to RIM shareholders.

Vic Alboini, Chairman and CEO of Jaguar, stated: “The status quo is not acceptable, the Company cannot sit still. It is time for transformational change. The Directors need to seize the reins to maximize shareholder value before more market value is lost.”

Jaguar strongly recommends that RIM’s Directors appoint a Special Committee of the Board consisting of four or five of the current seven independent directors to pursue a shareholder value maximization process.

Jaguar believes a transformational change to maximize shareholder value is necessary for the following reasons:

Poor Share Price Performance 

There has been a precipitous decline in the Company’s share price since 2008, from $149.90 in June 2008 to $29.59 on September 2, 2011, representing a decline of approximately 80.3%. In contrast, over the same timeframe, the TSX Composite Index has only fallen by approximately 14.8%. RIM’s chronic underperformance and repeated delays in executing its strategy have led Jaguar to the conclusion that fundamental change at RIM is required. Most importantly, RIM’s competitors have seen a significant increase in market share at RIM’s expense, both in the enterprise and consumer markets, and a corresponding increase in share price and overall valuation.

Lack of Innovation Resulting in a Loss of Market Share

While its rivals have demonstrated an ability to develop and market products with features that inspire consumer enthusiasm and drive higher adoption rates, RIM has clearly fallen short. Its failure to offer products with innovative features, combined with its limited selection of applications, has resulted in RIM losing market share to its competitors. While few would question the email and security capabilities of RIM’s BlackBerry platform, the reality is that RIM has failed to develop the multi-purpose device that meets the requirements of today’s dynamic consumer landscape.

The BlackBerry, once a market leader, has been relegated to number 3 in terms of market share behind Apple’s iPhone and Google’s Android phones. A recent comScore report estimated that RIM’s U.S. smartphone market share declined from 39% to 22% over the twelve month period ended July 31, 2011. This decline in the Company’s standing can largely be attributed to significant execution delays, inadequate mobile applications, and the lack of a competitive product that addresses the needs of the consumer marketplace.

With a reduced market share for RIM there is the serious risk that developers of mobile applications will prioritize developing applications for RIM’s competitors. There should be a concerted focus for RIM to encourage or finance the development of cutting edge mobile applications. This lack of an effective ecosystem is a key shortcoming that needs to be addressed.

Jaguar has noted the recent resignations of several key RIM employees. The disruption to the Company resulting from these departures could not have come at a more inopportune time. The ongoing exodus of RIM’s human capital raises questions about RIM’s ability to inspire and retain the talent that will be essential for RIM to regain its competitive standing.

Corporate Governance Concerns

Jaguar believes RIM’s current corporate structure, which includes Mr. James Balsillie and Mr. Mike Lazaridis as Co-Chief Executive Officers and Co-Chairmen of the Company, is ineffective and requires meaningful change. “Messrs. Balsillie and Lazaridis are first class entrepreneurs, but the current management arrangement with the Board impedes the Board’s effectiveness, in turn impacting RIM’s strategy, operations and performance”, stated Mr. Alboini.

At RIM’s most recent Annual General Meeting of shareholders, Northwest & Ethical Investments L.P. (“Northwest”), an institutional shareholder, proposed that the role of Chief Executive Officer and Chairman be divided and that RIM have an independent Chairman. However, Northwest withdrew its proposal after reaching a compromise with RIM that Jaguar believes is woefully inadequate.

RIM’s June 30, 2011 press release detailing the compromise outlined the formation of a Committee of independent directors to “study” the issues, “determine the business necessity” for Messrs. Balsillie and Lazaridis as Co-CEOs to have Board titles, “propose and provide a rationale for a recommended governance structure for RIM” and to report by January 31, 2012. Jaguar believes that this compromise clearly demonstrates the complacency that has led to the Company’s downfall, as well as the disconnect between the Board and its shareholder base.

“These issues can easily be determined in seven hours rather than seven months, and the solutions are obvious: one CEO and an independent Chairman” stated Mr. Alboini.

Recent Consolidation in the Mobile and Patent Spaces

Merger and acquisition activity has been prevalent in the technology industry recently, particularly regarding intellectual property, as highlighted by Google Inc.’s $12.5 billion proposed acquisition of Motorola Mobility Holdings, Inc.; Wi-LAN Inc.’s $480 million offer to acquire MOSAID Technologies Incorporated and the recent $4.5 billion acquisition of Nortel’s patents by a consortium of six companies including RIM.

On July 19, 2011 InterDigital, Inc. put itself up for sale, and the driving reason, as astutely articulated by the Chairman of InterDigital, was the recognition by major players in the mobile industry that the value of patent portfolios has increased substantially. The share price of InterDigital increased from $41.51 the day before the announcement of the value maximization strategy to the current price of $68.39.

In addition, Eastman Kodak Company announced on July 20, 2011 a value maximization strategy related to its digital imaging patent portfolios, a move it described as “reflecting the current heightened market demand for intellectual property.” Kodak stated “we believe the time is right to explore smart, opportunistic alternatives for our digital imaging patent portfolios.” Kodak shares increased from $2.31, the day before the announcement, to the current price level of $3.24.

Finally, the announcement on September 1, 2011 of MOSAID’s acquisition of 2,000 wireless patents and patent applications originally filed by Nokia further demonstrates the technology industry’s intensified interest in intellectual property.

With its own stock of coveted patents, RIM is positioned to benefit from the increased appetite for intellectual property, but the Board must change course and recognize the opportunity. RIM’s Directors must seize the reins, take note of recent merger and acquisition developments, and pursue a strategy that maximizes RIM’s value.

Without the commencement of a formal value maximization process, there is the potential for a serious loss of shareholder value. Jaguar believes now is the time to commence a formal value creation process.

[Long RIMM]

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Eric Jackson of Ironfire Capital has a superb article at Forbes (How a “Cash-Rich Split” Could Take Yahoo! to $41/Share) setting out his “cash-rich split” analysis of Yahoo! Inc. (NASDAQ:YHOO). Here’s Jackson’s analysis:

A “cash-rich split” is the ideal way that Yahoo! should deal with its Asian assets. Furthermore, Yahoo!’s advisers – Goldman Sachs (GS) — must know this. They are smart guys and this is so obvious. If Yahoo!’s board is not yet convinced of this, they should be. Any leveraged recap plan or selling only a small piece of Yahoo! to private equity would be highway robbery of the shareholders by the board compared to a “cash-rich split.”

  • What is a Cash Rich Split? Here is a definition.
    • A cash-rich split-off is an M&A technique whereby the Seller exchanges stock of the Company for stock of a “cash-rich” subsidiary of the Company (“SplitCo”) on a tax-free basis
    • Benefits of cash-rich split-off for Company:
      • Opportunity to tax-efficiently dispose of a non-core asset
      • Opportunity to repurchase shares at attractive price
      • Company should seek to negotiate a share of Seller’s tax savings through a discount in the valuation of the shares repurchased
    • Benefits of cash-rich split-off for Seller:
      • Tax-free disposition of Company’s low tax basis stock by Seller, substantially for cash
      • Seller can negotiate with Company to contribute operating assets which Seller seeks to acquire
      • Alternative use: can also be used to unwind a stock-for-stock monetization structure on a permaently tax-free basis (e.g. Time Warner Cable/Comcast)
  • How would this work for Yahoo? The pre-tax value of Yahoo!’s 40% preferred stake in Alibaba Group is around $14 billion based on related transactions over the past two months (and Yahoo!’s last earnings call). The pre-tax value of Yahoo!’s 35% stake in Yahoo! Japan is $6.5 billion at Yahoo! Japan’s current market price of Y25,000. Let’s discount this to $5.5 billion as Yahoo! Japan might need an incentive to participate and liquidity. Only 66% of the compensation involved in a “cash-rich split” can be in the form of cash. So for their $14 billion of Alibaba Group stock, Yahoo! would receive $9.2 billion in cash and $4.8 billion of “other” assets. The $5.5 billion for Yahoo! Japan shares would be roughly $3.6 billion in cash and $1.9 billion in “other” assets.
  • Where do Alibaba Group and Yahoo! Japan get billions in cash for this transaction? Jack Ma could sell shares of Alibaba Group to Temasek (main contributor) and perhaps other interested parties (such as DST, Silver Lake) also participate. Yahoo! Japan already has around $2.5 billion in cash today. The rest can come from Softbank (who’s also involved in both Alibaba Group & Yahoo! Japan) or a secondary offering.
  • What are the “other” assets that Alibaba Group & Yahoo! Japan can contribute? This looks like a key issue with Alibaba Group’s tangible assets of only a $2 billion and Yahoo! Japan without a non-core asset of significance. The key is that only 5-10% of the total contribution has to be from an asset owned for more than 5 years. The remaining assets (23-28% of total spin value) can be acquired as part of the deal. Hulu might be an interesting asset for $3 billion (or whatever the market price is) and would be a great strategic fit. There are many other content, video, and social acquisitions that could be additive to Yahoo!’s core business.
  • What restrictions would Yahoo! have with the SplitCo proceeds? Yahoo! would have access to the cash the day the transaction closes.
  • What would Yahoo! look like post the 2 “cash-rich splits” of their Asian assets? You’re waiting for $41/share. We’re getting there. This is where it gets very interesting. Post split, Yahoo! would have close to $16B in cash ($3 billion of their existing cash + $9.2 billion from Alibaba Group + $3.6 billion from Yahoo! Japan). Yahoo! would also control almost $7 billion of “other” assets contributed as part of the splits. And Yahoo! would still have their core search and display biz worth $7.5 – 12 billion (based on a 5x – 8x multiple). It’s hard to see this portfolio of assets worth much less than $30 billion vs. the current market cap of $20 billion. That translates to fair value of $25/share.
  • What is the bull case if this plays out as described above? Yahoo! would be advised to use their cash to conduct a massive equity shrink, using a series of tender offers. And, of course, the lower the buyback price, the more shares they could buy back and the higher Yahoo!’s fair value rises. Let’s say Yahoo uses the $16 billion in cash to buy back as many shares as they can for $18/share. The number of the shares outstanding will go from 1.25 billion to 350 million. Yahoo! would still own the $7.5 billion core business + $7 billion of assets (not including any value for the patents which is ludicrous). $14.5 billion/350m shares = $41 stock. And the board — if they were really channeling John Malone — could conceivably lever up and buy back more shares. Simple sensitivity around the average buyback price and leverage is a very interesting exercise for one to play with. You can get to above $45 and $50/share very quickly.
  • What are the risks? 1) I’ve said it before and I stand by it — this is the worst corporate board in America. They could make a dumb decision. Fortunately their advisers understand the “cash-rich split” potential and Dan Loeb is standing at the ready to ensure the board makes no bozo moves. 2) They could name a new CEO first, before explaining the rest of the plan. This gets back to point 1 and a dumb board. 3) There are obviously many parties involved and all have to agree on price, timing, etc.

The YHOO situation is starting to get very interesting with Dan Loeb and Third Point holding a position and agitating for change. With a potential $41/~$15 payoff, it’s worthy of further consideration.

No position.

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