Activist Investor Starboard Likely to Push for Sale at Integrated Silicon

As Starboard Value LP launches its latest activist campaign at Integrated Silicon Solutions Inc. (ISSI) the New York-based hedge fund could eventually push for a sale of the semiconductor manufacturer.

However, potential buyers may be scarce in the near term, as consolidation takes out likely acquisition candidates, industry observers said.

On Friday, Starboard disclosed a 7.2% stake in Integrated Silicon. Along with fellow hedge fund Oliver Press Partners LLC, of New York, the activists hold an 8% stake in the chip maker.

The investors also said the intended to nominate five director candidates for the company's board.

On Monday, the activists followed up with a letter to the company's board and its CEO and president Scott Howarth.

Starboard managing member Peter Feld and Oliver Press managing member Clifford Press said in their letter that ISSI is trading at a substantial discount to its peers partly because of its non-core acquisitions and that it should focus on profitable and growing core businesses.

"ISSI has carved out a strong niche selling specialty memory products — DRAM and SRAM — to the auto and industrial markets," they said, adding that the business now comprises about 75% of the company's revenue and is a growing, profitable one.

The duo also said the current board structure is "highly unusual and not in line with best practices."

There could be potential conflicts of interest, Feld and Press pointed, because the vice chairman of the board is also the company's executive vice president reporting to the CEO, but the CEO also has to report to the board.

The five director candidates nominated by the activists for election at the company's 2015 annual meeting: Feld, Press, Manoj Gujral, Cathal Phelan and Edward Terino. The 2014 annual meeting was held on Feb. 11.

Press said via phone Tuesday that through the board, management has been "irresponsible custodians" of cash. The company has also used cash flow to make misguided acquisitions, he said, explaining that Integrated Silicon should focus on its automotive segment that he called the "gem of the business."

A shareholder who asked to remain unnamed said most investors are hoping that ISSI gets cleaned up within the next year or two so that it could be ready as a "perfect company" for acquirers wanting to enter the market.

The shareholder added that while a number of companies have approached Integrated Silicon in the past, the board is known for not being open to discussions about being acquired.

In fact, Cypress Semiconductor Corp. (CY) and Spansion Inc. (CODE) had been considered as potential merger partners for the Milpitas, Calif.-based chip maker, this person said.

However, those two companies agreed Monday to an all-stock merger valued at $4 billion.

The merger takes away the two most logical buyers, at least for the near term, said Toan Tran, managing partner at technology-focused hedge fund Castle Union LLC.

"ISSI makes money making products that big guys don't want to be making anymore," Tran said, adding that market giants such as Micron Technology Inc. (MU) and SK Hynix Inc. aren't looking to enter ISSI's niche memory market.

Tran said ISSI could be a logical buy for post-merger Cypress a year or two from now, but the companies will be focused on integration before they can start being acquisitive.

Despite that, An industry source said Starboard might still try to push for a sale, with the activists believing Integrated Silicon could fetch multiples of mid-teens to earnings.

But Starboard's expectations may be more optimistic than realistic in the near term, the person said. When all things are equal, companies tend to fetch higher multiples when gross margins are at 40% to 60%, while Integrated Silicon's are at around 30%

The source also pointed that ISSI is different from some of Starboard's past campaigns, explaining that both the size and upside potential in gains aren't "nearly as big as [Starboard] could find in other places."

Other than Cypress and Spansion, international players such as Taiwan-based Winbond Electronics Corp. could emerge as potential suitors, said Gary Mobley, an analyst at Benchmark Co.

Shares of ISSI, which has a market capitalization of $483 million, are up about 31% year-to-date. The stock closed at $15.84 Tuesday.

Integrated Silicon confirmed Monday it had received the letter from the activists.

"ISSI will review the notice to ensure that it complies with ISSI's bylaws and applicable law," the company said in a statement. "ISSI's Board of Directors and the Board's Nominating Committee will consider the nominations in due course."

A company spokesman said via phone Tuesday that Integrated Silicon will review Starboard's suggestions and nominations carefully as it does with any suggestion from shareholders.

Starboard could not be reached by press time Tuesday.

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