Farukh Farooqi is a long-time supporter of Greenbackd and the source of some of the better ideas on this site. He has recently launched Marquis Research, a special situations research and advisory firm. Says Farukh:
We provide clients (mainly hedge/mutual funds) with investment ideas in bankruptcies, post reorg equities, activist-driven situations, liquidations, recapitalizations and spinoffs.We currently follow more than 50 bankruptcies of large, public companies which include Six Flags, Chemtura, GSI Group, Spansion and SemGroup. Our main goal is to provide institutional clients with actionable ideas as opposed to “Street” research.
Farukh has spent a dozen years on the sell-side and the buy-side. Prior to founding Marquis Research, he was a Senior Analyst at Kellogg Capital Group, responsible for generating investment ideas for the Special Situations Group and he also worked closely with the risk-arbitrage desk. Before joining Kellogg, he was a Senior Analyst at Jefferies & Company. His coverage included bankruptcies and post-reorg equities. He was acknowledged for his work in the post-bankruptcy space by The Deal in the article “Scavenger Hunter.”
Though he has been living in the New York Metropolitan area for more than 20 years, he has never stopped being a fan of the Washington Redskins. Farukh has also completed the Philadelphia and the New York City Marathons.
Here’s his take on Silicon Storage Technology, Inc (NASDAQ:SSTI):
Activist-Driven Situation Summary: Silicon Storage Tech. (SSTI; $2.78) dated January 6, 2010
SST is a fabless, designer and supplier of NOR flash memory chips which are used in thousands of consumer electronic products. It has two businesses – Products sales of $240 mm with 20% gross margin and licensing revenues of $40 mm with near 100% margin.
As of September 30, 2009, SST had cash and investments of $2.14 per share, net non-cash working capital of $0.41 per share and zero debt. This implies that the market is valuing its business at $0.23 per share or $22 mm. This is a Company which annually spends $50 mm on R&D alone!
Judging from last 10 years of SST’s history, valuation has suffered from (1) dismal bottom line performance and (2) Corporate governance issues.
After bottoming in Q109, Company revenues and margins have rebounded sharply. The Board has decided to take this opportune time to create “value” for shareholders by selling it to a private equity fund for … $2.10 per share. As part of the deal, the current CEO and COO are going to keep their equity interest in the private Company.
In response, an activist shareholder (Riley Invesment Management) resigned from the Board when the Go-Private deal was announced. Last week, he and certain other large shareholders formed SST Full Value Committee and have asked the Board to reconsider the transaction.
Given the governance issues (which could improve as a proxy fight to add independent members is underway), a discount to the peer group is warranted. However, whether you value it on EV/Revenue, EV/EBITDA or Price/Tangible Book Value, the stock has 50% to 200% upside potential.
[Full Disclosure: I do not hold SSTI. 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.]
[…] Deal in the article “Scavenger Hunter”) and Greenbackd guest poster (see, for example, Silicon Storage Technology, Inc (NASDAQ:SSTI) and the SSTI archive here) has launched a blog, Oozing Alpha. Says Farukh: Oozing Alpha is a place […]
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[…] and his methodology, see The Deal in the article “Scavenger Hunter”) provided a guest post on Silicon Storage Technology, Inc (NASDAQ:SSTI) a few weeks back. Farukh wrote: Activist-Driven Situation Summary: Silicon Storage Tech. (SSTI; […]
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What now??!!
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SSTI being acquired by MCHP for $2.85 per share.
Does this price make sense?
SSTI has $2.55 per share in cash, investments and net working capital. Which means, MCHP is really offering $0.35 per share in value or approximately $35 mm for a semiconductor business which generates $280 mm in sales and almost $50 mm per anum in gross profit and another $40 mm per year in license fees.
The license fees alone can be worth $200 mm using a 20% yield.
SST story reminds me of the Road Runners cartoon with management being the Wile E. Coyote, trying to sabotage shareholders every which way….. Beep Beep.
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reasons for having SSTI in my portfolio
share buybacks starting Q1 2008 and ending Q4 2008 for the following amounts ( $10.981(Q4), 5.522(Q3), 5.485(Q2), 5.827(Q1) million)!
share count reduced to the same level at the end of 2003!
Mean reversion, off 58% from 5 year high, 3 year return —-17%
Average 5 year FCF as a percentage of the current EV is 12.09%
Share short only 2.2%
P/S 2005 = 1.20
PS TTM = 1.1
P/B 2005 = 1.4
PS TTM = 1.00
Discount to industry valuation
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Thomas:
You are correct. There is no way to count it with that much accuracy but as a rule of thumb, if a large number of shares outstanding trade well above the bid price, it is a very good indication that the market does not believe that the deal will be consumated at the bid.
I have seen cases in liquidations where the market cap was so low that a majority of investors simply didnt bother to vote. That is not the case here, SST has a decent market cap and I doubt if the deal will go through just by default.
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Thank you for your fast reply. This situation is cetainly new for me but I will follow it very closely and hopefully learn something new.
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I’m guess the CEO makes out like a bandit on this sweetheart sellout for less than fair value…
So much for looking out for shareholder interests…
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Double F: I am not sure I understand your analysis. You say 25-30 % of the shares has been traded above the 2.10 tender. Do you base this on trading volume alone? How do you know it is not the same shares traded back and forth. Also how do you know all theese owners will vote? Can’t it also be retail and vairous noice trading (quantitative, index funds, whatever) that doesn’t intend to vote?
I would really appreciate an explanation.
Thank you in advance
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Double F: I am not sure I understand your analysis. You say 25-30 % of the shares has been traded above the 2.10 tender. Do you base this on trading volume alone? How do you know it is not the same shares traded back and forth. Also how do you know all theese owners will vote? Can’t it also be retail and vairous noice trading (quantitative, index funds, whatever) that doesn’t intend to vote?
I would really appreciate an explanation.
Thank you in advande
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given that shares are trading at $2.71 I’m not sure how valuable this idea is anymore…. still interesting though to read through to better understand the next opportunity that comes along. these guest posts are great! some very smart minds roaming around on this site :)
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The odds are actually quite easy to estimate. Approximately 25%-30% of the stock has traded above the $2.10 bid since the offer was announced. The activists own another 13% and we would not be double counting thier shares since they would have had to file with the SEC for any new trades.
I think that you will agree that folks wouldnt buy the stock well above the bid and then tender for $2.10…
The deal requires a majority of the shares to vote for the deal to go through.
QED
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If the deal does not get canceled, shareholders will only get $2.10 per share. Are you saying you think there is a significant chance for a better offer or just no deal at all? How do you estimate the odds of the possible outcomes?
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