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Posts Tagged ‘Trident Microsystems Inc (NASDAQ:TRID)’

Spencer Capital Management LLC has announced that it intends to nominate an alternate slate of candidates for the board of Trident Microsystems Inc (NASDAQ:TRID). We’ve been following TRID since January 21 this year, arguing that it’s a good candidate for an activist campaign for the following reasons:

  1. It’s large for a net cash stock: As its $1.30 close yesterday, the company has a market capitalization of $83M. That puts it into the strike zone for funds with around $100M under management.
  2. It’s deeply undervalued: We estimate its liquidation value is around $167M or $2.66 per share, which is more than 100% higher than its close yesterday.
  3. Its value is predominantly cash: TRID is trading at half net cash value of approximately $155M or $2.48 per share.
  4. Its stock is liquid enough: According to TRID’s Google Finance page, the average volume for the stock is more than 530,000 shares per day. It traded more than 655,000 yesterday. With 63M 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.
  5. Management holds a vanishingly small number of shares and are net sellers.

Spencer Capital Management is a “New York-based fund advisor that specializes in deep value investing” headed by Kenneth H. Shubin Stein, MD, CFA. We’re not sure how much stock Spencer Capital Management holds. TRID doesn’t seem to feature in its most recent Form 13F and no 13D has been filed since December 31, 2008, the end of the period covered by the Form 13F. The investor’s press release reads as follows:

SPENCER CAPITAL MANAGEMENT, LLC SEEKS TO RESTRUCTURE THE BOARD OF DIRECTORS OF TRIDENT MICROSYSTEMS

Effort Aimed At Strengthening Corporate Governance And Repositioning Struggling Technology Company

Spencer Capital Management LLC, a New York-based investment partnership, announced today its intention to put forth a slate of candidates for election to the board of Trident Microsystems, Inc. (TRID). Trident Microsystems, based in Santa Clara, California, is a designer of integrated circuits for the digital television market.

Kenneth H. Shubin Stein, MD, CFA, and founder of Spencer Capital Management is leading the effort to restructure the board with an aim towards improving corporate governance and repositioning the company.

“This is a company whose revenue has deteriorated significantly, product line has lost ground and business model is under enormous pressure,” said Dr. Shubin Stein. “We intend to run a slate of candidates whose interests will be aligned with shareholders and who have the investing and technological expertise to effectively analyze the assets of the company and maximize their value. We encourage all shareholders to reach out to us to further discuss this proposal.”

Hat tip to JM.

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Trident Microsystems Inc (NASDAQ:TRID) has filed its results for the quarter ended December 31, 2008. While its earnings and operating cash flow have now turned negative, its liquidation value remains almost unchanged. In our original post we wrote that TRID is an undervalued net cash stock looking for a catalyst. We continue to think it’s a good candidate for an activist campaign for the following reasons:

  1. It’s large for a net cash stock: As its $1.32 close yesterday, the company has a market capitalization of $83M. That puts it into the strike zone for funds with around $100M under management.
  2. It’s deeply undervalued: We estimate its liquidation value is around $167M or $2.66 per share, which is more than 100% higher than its close yesterday.
  3. Its value is predominantly cash: TRID is trading at half net cash value of approximately $155M or $2.48 per share.
  4. Its stock is liquid enough: According to TRID’s Google Finance page, the average volume for the stock is more than 530,000 shares per day. It traded more than 427,000 yesterday. With 63M 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.
  5. Management holds a vanishingly small number of shares and are net sellers.

We confess that – aside from the litigation and regulatory investigations into TRID’s granting of stock options – we can’t see the problem with TRID. Please leave a comment if you can see what we are missing.

The value proposition updated

TRID continues to boast 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):

trid-summary-2009-12-31While TRID has burned through $18M of cash since our last post, it has reduced its liabilities by around the same amount, so its liquidation value remains unchanged. The slight reduction in liquidation value is a direct result of the additional stock on issue, which is the really TRID’s whole story: management takes the value that should belong to the shareholders.

Off-balance sheet arrangements and Contractual obligations

According to the 10Q, TRID has no off-balance sheet arrangements and its contractual obligations are relatively modest $11.6M, which includes total operating lease payments of $2.5M and total purchase obligations of $9.1M. There is also a long-term income tax payable of $20.1M but TRID is “unable to make a reasonably reliable estimate of the timing of payments in individual years beyond twelve months due to uncertainties in the timing of tax audit outcomes.”

Contingencies

The only real area of concern for us is the litigation and regulatory investigations into TRID’s granting of stock options. The following is extracted from the 10Q:

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 our current or former officers and directors caused it to grant options at less than fair market value, contrary to our public statements (including our financial statements); and that as a result those officers and directors are liable to us. No particular amount of damages has been alleged, and by the nature of the lawsuit no damages will be alleged against us. The Board of Directors has appointed a Special Litigation Committee, or SLC, composed solely of independent directors, to review and manage any claims that we may have relating to the stock option grant practices investigated by the SLC. 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. We cannot predict whether these actions are likely to result in any material recovery by or expense to, Trident. We expect 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 DOJ is currently conducting an investigation of us in connection with our investigation into our stock option grant practices and related issues, and we are subject to a subpoena from the DOJ. We are also subject to a formal investigation by the SEC on the same issues. We have been cooperating with, and continue to cooperate with, inquiries from the SEC and DOJ investigations. In addition, we have received an inquiry from the Internal Revenue Service to which we have responded. We are unable to predict what consequences, if any, that an investigation by any regulatory agency may have on it. Any regulatory investigation could result in our business being adversely impacted. If a regulatory agency were to commence civil or criminal action against us, it is possible that we 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 our former officers, directors and/or employees and might result in such sanctions against us and/or our current officers, directors and/or employees. Any regulatory action could result in the filing of additional restatements of our prior financial statements or require that we take other actions. If we are subject to an adverse finding resulting from the SEC and DOJ investigations, we could be required to pay damages or penalties or have other remedies imposed upon us. 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 our business. In addition, our 401(k) plan and its administration were audited by the Department of Labor but no further action was noted.

Indemnification Obligations

We indemnify, as permitted under Delaware law and in accordance with our Bylaws, our officers, directors and members of our senior management for certain events or occurrences, subject to certain limits, while they were serving at our request in such capacity. In this regard, we have received, or expect to receive, requests for indemnification by certain current and former officers, directors and employees in connection with our investigation of our historical stock option grant practices and related issues, and the related governmental inquiries and shareholder derivative litigation. The maximum amount of potential future indemnification is unknown and potentially unlimited; therefore, it cannot be estimated. We have directors’ and officers’ liability insurance policies that may enable us to recover a portion of such future indemnification claims paid, subject to coverage limitations of the policies, and plan to make claim for reimbursement from our insurers of any potentially covered future indemnification payments.

The catalyst?

Still none. No investors have disclosed an activist position in this stock and management still seem intent on helping themselves to big portions of options and restricted stock. Rather than pay dividends to long-suffering stockholders, they’ll retain the earnings to pump up the stock price, which helps with their options. The company could comfortably pay a special dividend of around $2.75 per share and still leave $40M of cash in the bank.

Conclusion

TRID’s board and senior management should be embarrassed that TRID is a perennial net net stock and now trades consistently below its net cash value. The market is sending a clear message when it values stock at less than net cash value. That they have the effrontery to gift themselves such huge helpings of stock and options in the face of such a message is astonishing. Even though it’s deeply undervalued, without some external pressure to allign management’s interests with its stockholders, TRID will remain that way. For the reasons we outlined above, TRID seems to us to be a prime candidate for an activist campaign. We can’t figure out why no activists are interested in this stock. What are we missing? Are we underestimating the impact of the litigation and regulatory investigations into TRID’s granting of stock options?

TRID closed yesterday at $1.32.

The S&P500 Index closed yesterday at 764.90.

[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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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:

  1. 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.
  2. 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.
  3. Its value is predominantly cash: TRID is trading at two-thirds of its net cash value of approximately $155M or $2.50 per share.
  4. 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):

trid-summaryThere 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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