We own Tessera at a cost of approximately $16 per share. Our thought process was simple: a conservative analysis of their IP portfolio’s current cash stream plus cash on the balance sheet suggested a valuation of $15 per share, leaving $1 of implied value for the venture portfolio of their Digital Optics (DOC) business, in addition to any potential unseen value trapped in the IP portfolio. Subsequent events, legal settlements, and client renewals have added an additional $4-$5 in value. The initial analysis of the DOC business indicated that by the end of 2015, the segment could have been a real stand-alone business with $200 million in revenues operating with a 10-12% margin and worth another $7-$10 per share. Downside boredom—upside large.
Not included in our analysis was the appearance of Starboard Value, who seem like rational folks that have simply “drilled it” in the past few years through focused activist campaigns; for example, in their handling of AOL, MIPS Technologies and Office Depot. With our inherent distrust of public companies residing “north of Santa Barbara,” we welcome Starboard’s pressure on management to justify current spending and capital allocation, and look forward to casting votes in favor of their board representation. In the meantime, we invite all of you to read the following exchange between Starboard and the Board of Directors of Tessera. Topics will include:
- Starboard’s case against management’s spending and capital allocation
- A letter of resignation by two of the board members in protest of the continuous meddling of the Chairman
- Accusations of blackmail
- Mistresses on the payroll
- Improper board actions
- A plethora of other corporate governance issues
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