Lecture #4: An Investor Discusses a Distressed Technology Company

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I came upon these great notes. Names had to be removed but should be clear to any value investor. I assume they are okay to post, but if I am asked to move them, I will obviously comply right away. Lecture #1 can be found here, #2 here, searching for #3…. I disabled downloading/printing etc. not to be mean, but for other reasons, please do not email me for a copy.

The war stories continue.   In this lecture an experienced investor speaks about how he found, valued and managed his investment in a distressed technology company, MIPS Technologies, Inc.

You may wish to revist this depending upon your level of investing knowledge.  You should learn about one type of search strategy to find unreflective (uneconomic) forced selling.

Remember that reading a case study about investing is a bit like reading about sex or sky-diving.  Doing is different than observing.  Can you act calmly and rationally during a bear market to buy a company after a huge price decline assuming there is value above price?  A severe bear market (1929, 1974, 1987, 2008) feels like this (go to 1 minute 45 seconds of this video)http://www.youtube.com/watch?v=P6PhbLxLGno. Would you be able to act on an opportunity feeling such fear?

This 30 page document can be found here (see more below):

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An Activist investor takes a run at MIPS (the company mentioned in the lecture). Knowledge is cumulative as regards to investing.

September 12, 2011

Sandeep Vij
MIPS Technologies, Inc
President and CEO
955 East Arques Avenue
Sunnyvale, CA 94085

CC: Board of Directors

Dear Sandeep,

Starboard Value LP, together with its affiliates and director nominees, currently owns 9.1% of the outstanding common stock of MIPS Technologies, Inc. (“MIPS” or “the Company”), making us the Company’s largest shareholder. This morning, we delivered a letter to the Company formally nominating four highly qualified candidates for election to the Board of Directors (the “Board”) at the Company’s 2011 Annual Meeting.

We believe that MIPS’ common stock is deeply undervalued and that meaningful opportunities exist to unlock significant value based on actions within the control of management and the Board. Despite a highly profitable royalty stream, market-leading technology and valuable intellectual property, MIPS stock has dramatically underperformed over an extended time period. The director nominees we have proposed have the requisite skill sets to assist the Board in evaluating opportunities to improve performance and shareholder value.

As shown in the table below, MIPS’ stock price performance has been dismal dating back to the Company’s Initial Public Offering (“IPO”) in 1998. As of August 22, 2011, the last trading day prior to our 13D filing, MIPS shares traded at $4.34 per share, a decline of 69%, versus the IPO price of $14.00. During the same period, the average share price of MIPS’ Peer Group and the broader indices have increased by approximately 120% and 42%, respectively.

Share Price Performance (1)
1 Year 3 Year 5 Year Since IPO

Russell 2000 Index 6.6 % (11.7 %) (6.7 %) 42.4 %
Peer Group (2) 8.2 % 18.1 % 5.9 % 119.8 %
MIPS (33.1 %) 8.5 % (37.2 %) (69.0 %)
Underperformance vs. Russell (39.8 %) 20.2 % (30.5 %) (111.4 %)
Underperformance vs. Peer Group (41.3 %) (9.6 %) (43.1 %) (188.8 %)

1. Performance as of 8/22/11.
2. Peer Group consists of companies used in MIPS proxy to set executive compensation and include AATI, ARMH, CEVA, ENTR, EXAR, GSIT, IKAN, LAVA, PSEM, PDFS, PLXT, SUPX, TXCC, TRID and VLTR.

 

 

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