The following is from an email which Whitney Tilson sent to investors.

 

Whitney Tilson

What an interesting situation, which is now my largest short position (after I add to it this morning).

Montage Technology Group MONT

I first shorted Montage Technology Group Ltd (NASDAQ:MONT) late last year in the high teens when I concluded that a majority of its sales were either fictional or illegal – and I’m even more certain of it today (see attached and below for various reports on this).

PDSTI’s non-binding proposal  to acquire Montage

Then in March of this year, Montage Technology Group Ltd (NASDAQ:MONT) announced that a non-binding proposal to acquire the company for $21.50 in cash was made by “Shanghai Pudong Science and Technology Investment Co., Ltd. (“PDSTI”), a wholly state-owned limited liability company directly under Pudong New Area government of Shanghai.”

The stock traded up to almost the bid and I figured PDSTI would soon figure out that MONT was a fraud and walk, so I didn’t cover.

Then, this morning Montage Technology Group Ltd (NASDAQ:MONT) issued a press release (below) announcing that it had entered into a “definitive merger agreement under which PDSTI will acquire all of the outstanding Ordinary Shares of Montage for US$22.60 per Ordinary Share.”

Tilson certain on his investment in Montage

In light of this, am I wrong in my conclusion about Montage Technology Group Ltd (NASDAQ:MONT)? I don’t think so. In fact, after reading Aristides Capital’s latest report (below), which coincidentally was also released this morning, I’m more certain than ever.

But then why is PDSTI going through with the deal? Of course they’ve read the Gravity and Aristides reports, so are they really that clueless? I think not. Rather, my best guess is that this is a well-orchestrated scam to defraud the government of Shanghai, which is the sole investor in PDSTI. It’s really pretty simple: the guys running PDSTI are conspiring with the guys running Montage Technology Group Ltd (NASDAQ:MONT) to pay $693 million for a company that’s maybe worth $100 million – and then they share the excess proceeds of $593 million among themselves. I can’t prove this of course – it’s only speculation, but it’s what makes the most sense to me. If you think this sounds far-fetched, you don’t know China very well. Using government money to vastly overpay for acquisitions is a very common scam.

That said, this is China so the deal still might go through – I’d estimate that there’s a 50% chance that it does. But a lot can happen between now and when the deal actually closes (estimated at 12/1). Among other things, Montage Technology Group Ltd (NASDAQ:MONT) is in the midst of an internal self-audit for fraud and also is an arrears in filing its 2013 annual financials, so my best estimate is that there’s a 50% chance that PSDTI walks.

This morning, the stock has traded up nearly 10% to $21.70, so am I covering and throwing in the towel? Heck no – I added to my position as this is now one of the best shorts I’ve ever seen. If the deal goes through at $22.60, my loss is a mere 4% — and if it breaks, the upside is 50-100%. Now THAT’S the kind of risk-reward I like!

Montage Technology Group Enters Into Merger Agreement to be Acquired by Shanghai Pudong Science and Technology Investment Co. for US$22.60 Per Share

Montage Technology Group Ltd (NASDAQ:MONT) (“Montage” or “Montage Technology” or the “Company”), a global fabless provider of analog and mixed-signal semiconductor solutions addressing the home entertainment and cloud computing markets, and Shanghai Pudong Science and Technology Investment Co., Ltd. (“PDSTI”), a wholly state-owned limited liability company directly under Pudong New Area government of Shanghai, today jointly announced that they have entered into a definitive merger agreement under which PDSTI will acquire all of the outstanding Ordinary Shares of Montage for US$22.60 per Ordinary Share. The merger values Montage’s equity at approximately US$693 million, on a fully diluted basis. The transaction is subject to approval by the shareholders of Montage, and antitrust and other regulatory approvals.

The Company’s Board of Directors unanimously approved the merger agreement and recommends that the Company’s shareholders vote to approve the merger agreement. Montage expects to hold a special meeting of its shareholders to consider and act upon the proposed transaction as promptly as practicable. Details regarding the record date for, and the date, time and place of, the special meetings will be included in a press release when finalized.

With annual revenues of approximately US$110.9 million for 2013, Montage Technology Group Ltd (NASDAQ:MONT) is a global fabless provider of analog and mixed-signal semiconductor solutions addressing the home entertainment and cloud computing markets. In the home entertainment market, Montage’s technology platform enables the company to design highly integrated end-to-end solutions with customized software for set-top boxes. These solutions optimize signal processing performance under demanding operating conditions typically found in emerging marketing environments. In the cloud computing market, Montage offers high performance, low power memory interface solutions that enable memory intensive server applications. Its technology platform approach allows Montage to provide integrated solutions that meet the expanding needs of customers through continuous innovation, efficient design and rapid product development.

“After a review of strategic alternatives, the Montage board of directors is pleased to reach this agreement, which provides shareholders with substantial cash value, as well as a premium to our unaffected share price,” said Dr. Howard Yang, Chairman and Chief Executive Officer at Montage Technology Group Ltd (NASDAQ:MONT). “In addition, Montage believes the transaction will provide additional operational flexibility and position us to invest more strategically to drive powerful innovation and deliver cutting edge customer solutions. We look forward to working closely with all parties to complete this transaction.”

Dr. Xudong Zhu, Chairman of PDSTI, commented, “This acquisition underscores PDSTI’s strategy of supporting leading companies within the semiconductor industry. Montage has a remarkable track record of pioneering and delivering best-in-class technology solutions for the global semiconductor market. We look forward to working with Montage Technology Group Ltd (NASDAQ:MONT)’s talented management team as they continue their strong performance and innovative corporate culture.”

Stifel is serving as financial advisor to Montage and O’Melveny & Myers LLP is serving as legal advisor to Montage Technology Group Ltd (NASDAQ:MONT). Barclays PLC (ADR) (NYSE:BCS) (LON:BARC) and China International Capital Corporation Limited are serving as financial advisors to PDSTI, and Kirkland & Ellis is serving as legal advisor to PDSTI.