Are Silicon Storage Holders Getting Enough? (SSTI)

Silicon Storage Technology, Inc. (NASDAQ: SSTI) is trading up on a private equity and management-led buyout.  SST is flash memory maker based in Sunnyvale, California.  While the company has entered into a definitive merger agreement to be acquired for $2.10 per share, it is almost impossible not to wonder (at best) if this price is a fair value to the Silicon Storage shareholders who would be getting cashed out if a majority approves the deal.

First off, the company is being acquired by Prophet Equity LP’s Technology Resource Holdings, Inc. as well as by members of Silicon Storage’s management team.  The $2.10 price is also only a 13% premium to yesterday’s close.  It seems some believe that the private equity and management-led buyout will have to pony up more.  Shares are above the buyout price.

Prophet Equity LP will pay $2.10 per share, although the exception is over the shares held by Bing Yeh, Chairman and CEO, and Yaw Wen Hu, Executive Vice President and COO and member of the Board of Directors.  Yeh and Hu are exchanging all of their shares of existing common stock for shares of capital stock of the private held company.

For starters, the 52-week trading range is $1.30 to $3.12.  The market cap is a mere $211.8 million and that is after today’s pop.  The September 30 balance sheet lists all liabilities as a mere $61.02 million and listed the following cash and liquid assets: $75.25 million cash, $40.6 million short-term investments, and $95.74 million in long-term investments.  If you back out the goodwill and intangible assets, the value of the company’s tangible assets according to the company’s reports is some $238.76 million.

While management did approve the deal, it is also recommending that shareholders approve the deal too. There is a go-shop provision for a strategic committee made up of the company’s independent directors.  This is a 45-day provision from today.

The company’s 2008 annual report notes that its SuperFlash products are incorporated into products sold by many well-known companies including Apple, Asustek, BenQ, Cisco, Dell, First International Computer, or FIC, Gigabyte, Haier, Huawei, Infineon, Intel, IBM,Inventec, Legend Lenovo, LG Electronics, Freescale Semiconductor, NEC, Nintendo, Panasonic, Philips, Quanta, Samsung, Sanyo, Seagate, Sony, Sony Ericsson, Toshiba, Texas Instruments, VTech and ZTE.  The company also license its SuperFlash technology for applications in semiconductor devices that integrate flash memory with other functions on a monolithic chip to leading semiconductor companies including X-Fab, Analog Devices, IBM, Freescale Semiconductor, Inc., National Semiconductor Corporation, NEC Corporation, Samsung Electronics Co. Ltd., Sanyo Electric Co., Ltd., or Sanyo, Seiko Epson Corporation, Shanghai Grace Semiconductor Manufacturing Corporation, or Grace, Shanghai Hua Hong NEC Electronics Co., Ltd., or HHNEC, Taiwan Semiconductor Manufacturing Co., Ltd., or TSMC, Toshiba Corporation, Vanguard International Semiconductor Corporation, Powerchip Semiconductor Corporation and Winbond Electronics Corporation.  It also derived 87.7%, 88.8% and 87.3% of  net product revenues during 2006, 2007 and 2008, respectively, from product shipments to Asia.

There is also a notice in the “Related Party Transactions” showing some cross ownership and board representations over supply arrangements that are owned by members of management.  That was on page 40 of the 2008 annual report.  Without knowing those arrangements in the same detail as the company’s management, it is impossible to comment on that.

Silicon Storage has seen declining revenues… $452.5 million in 2006, $411.7 million in 2007, and $315.5 million in 2008.  No estimates are available today for the period ahead.  Where this gets interesting is that if you were magically able to back out the R&D costs, this would have been a profitable company.  And that is before chopping down on SG&A expenses.  While we do not expect those costs to be able to be backed out, it is plausible that some developments may be happening favorably with one or more of its customers considering how many large technology players are named in there.

Five years ago may not matter to most but this was a $5.00 back in 2004 and was much higher back in 2000 and 2001 above $20 and $30 during the tech bubble (split-adjusted).  You never know if something is brewing that would be a game-changer in these management-led buyouts.  But what is easy to see is that this is a low-premium buyout and at a price that is under its tangible book value and under its stated book value.

JON C. OGG