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Archive for the ‘Silicon Storage Technology Inc (NASDAQ:SSTI)’ Category

Farukh Farooqi, a long-time supporter of Greenbackd and the founder of Marquis Research, a special situations research and advisory firm (for more on Farukh 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 (see the post archive here). At the time of the post, SSTI was trading around $2.70. The stock is up 15.6% to close yesterday at $3.12.

SSTI has announced an amended merger, increasing the bid to $3.00 per share in cash. Here’s the announcement:

Silicon Storage Technology Announces Amended Merger Agreement with Microchip

SST Shareholders to Receive $3.00 Per Share in Cash

SUNNYVALE, Calif., Feb. 23 /PRNewswire-FirstCall/ — SST (Silicon Storage Technology, Inc.) (Nasdaq: SSTI), a leading memory and non-memory products provider for high-volume applications in the digital consumer, networking, wireless communications and Internet computing markets, today announced that it has entered into an amendment to its previously announced merger agreement with Microchip Technology Incorporated (Nasdaq: MCHP) (“Microchip”), a leading provider of microcontroller and analog semiconductors. Pursuant to the amendment, the purchase price for each share of SST common stock has been increased from $2.85 to $3.00 per share in cash. The amended termination fee payable in the circumstances and manner set forth in the merger agreement remains at 3.5% of the total equity consideration.

The amended agreement has been unanimously approved by SST’s Board of Directors acting upon the unanimous recommendation of its independent Strategic Committee. Microchip proposed the revised terms in response to a proposal received by the Strategic Committee from a private equity firm.

As previously announced, the Microchip transaction, which is expected to close in the second calendar quarter of 2010, is conditioned on approval of a majority of the outstanding shares of SST common stock as well as customary closing conditions. The transaction, which will be funded with cash on hand, is not subject to financing.

Houlihan Lokey is serving as the exclusive financial advisor to the Strategic Committee of the SST Board of Directors in connection with the transaction.

Shearman & Sterling LLP is serving as legal advisor to the Strategic Committee of the SST Board of Directors in connection with the transaction.

Cooley Godward Kronish LLP is serving as legal advisor to SST in connection with the transaction.

Wilson Sonsini Goodrich & Rosati, PC is serving as legal advisor to Microchip in connection with the transaction.

Says Farukh:

Subsequent to the MCHP $3/sh cash bid, Cerberus and SST Full Value Committee (actvist group) came up with a competing bid.

This competing bid is very interesting. It offers shareholders to either (1) take $3.00 per share in cash or (2) $2.62 in cash (via a special dividend) and an equity stub, thus giving shareholders the ability to participate in future upside.

I am in the process of valuing the stub but just wanted to make you aware of the development.

This is getting really interesting in that we now have two competing bids and it remains to be seen how, if at all, MCHP counters.

[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.]

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Farukh Farooqi, a long-time supporter of Greenbackd and the founder of Marquis Research, a special situations research and advisory firm (for more on Farukh 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; $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.

Farukh has left a comment that I want to draw to your attention:

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.

[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.]

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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.]

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