Starboard Value LP, an activist hedge fund, recently urged the management of TriQuint Semiconductor (NASDAQ:TQNT) to consider selling or restructuring its Mobile PA business because it is under-performing and consequently dragging down the entire performance of the company.

Starboard Value

The stock price of TriQuint Semiconductor (NASDAQ:TQNT) gained nearly 6% to $7.75 per share after the activist hedge fund disclosed its proposal to the company. Starboard Value LP owns 8% stake in the company.

In its letter sent to the board of directors of TriQuint Semiconductor (NASDAQ:TQNT), Starboard Value LP pointed out that the company underperformed its peers despite the strong growth and profitability of its Networks & Defense and BAW Filter businesses. The activist hedge fund noted that the company lost money on a net income basis over the past 12 months primarily due to the performance problems of its Mobile PA business.

TriQuint is still among the leaders

“While TriQuint is still among the leaders in both technology and brand name, with leading positions in certain cellular bands as well as WiFi, and has several proprietary technologies around packaging, including Copper Flip Chip and Wafer Level Packaging, we believe this business is currently losing a substantial amount of money,” wrote Starboard’s managing member Jeffrey Smith.

Starboard Value LP estimated that the Mobile PA business of TriQuint Semiconductor (NASDAQ:TQNT) generated less than 10% gross margin over the past 12 months, an indication that it is suffering massive losses on EBITDA basis. According to the activist hedge fund, the losses were due to significant capacity utilization since its $200 million capital investments in the business in 2010 and 2011 failed to materialize and left it in a position of severe underutilization. The hedge fund projected the business is operating at a rate of 40% to 50% utilization or even worse.

Smith emphasized, “It appears that management’s strategy with regard to its utilization problems has been to hope for revenue growth to drive increased utilization. Unfortunately, the hope-for-growth strategy has not produced results, and the Mobile PA business remains a significant drag on overall performance.”

Starboard Value already expressed its desire

He added that Starboard Value LP already expressed its desire to start its discussions with the board of directors of TriQuint Semiconductor (NASDAQ:TQNT) regarding strategy and the composition of the board to explore ways to create shareholder value.

Edward Snyder, analyst at Charter Equity Research, expressed his skepticism regarding the ability of the Mobile PA business to operate as a standalone company if sold by TriQuint. He said, “It’s a double-edged sword. On the one hand, you can break up the company and get more value in the short term but you may also end up killing it off.”