An Open Letter to the Board of Directors of Actions Semiconductor Co., Ltd.
May 27, 2014
Mr. Hsiang-Wei Lee
Chairman of the Board
Actions Semiconductor Co., Ltd.
No. 1 Ke Ji Si Road
Technology Innovation Coast of Hi-Tech Zone
Zhuhai, Guangdong, 519085
People’s Republic of China
Dear Mr. Lee:
As you are aware, Accretive Capital Partners has been a significant and supportive shareholder of Actions Semiconductor for more than six years. Accretive is one of the largest owners of Actions stock, holding over 3 million ADS shares (or 18 million ordinary shares), and we have worked hard to be value-added partners to the company and our fellow shareholders. We have provided constructive advice during these years and have outlined logical steps to optimize the allocation of shareholder assets as the company grows its business. As careful custodians of capital, we are dedicated to allocating funds entrusted to us by our investors thoughtfully and rationally, and we strive to partner with companies that are equally committed to being strong stewards of capital. And when this commitment is not being fulfilled, as with Actions, we will take corrective measures.
For more than five years, Actions Semiconductor has generated consistent quarterly operating losses, and the stock has traded at a fraction of tangible book value (and, astonishingly, of net cash value). The company sits atop a $253 million cash hoard which is being allocated to risky, conflicted, and sub-optimal investments, providing returns well below those available via purchases of the company's own stock. During this time, the company’s disproportionate investment in research and development has yet to produce $1 of value for $1 invested. Accordingly, and once again, Accretive Capital Partners strongly urges the Board of Directors of Actions Semiconductor to take the following steps on behalf of shareholders immediately:
• Initiate a Dutch auction tender offer for no less than $100 million to repurchase shares;
• Retire all repurchased shares so that shareholders realize the value of the tender offer;
• Correct the blatant misuse of company assets, resulting from direct conflicts of interest among the company’s Board of Directors;
• Explore a sale of the company.
It has been more than five years since we first urged Actions to initiate a modified Dutch auction tender offer to accelerate stock repurchases, and our message remains consistent. As early as 2009, during the second quarter earnings conference call, we stated that “it would make a lot of sense, it seems, to consider other ways of repurchasing shares, such as a Dutch tender offer." We have reiterated the same recommendation to Actions on every subsequent quarterly earnings call -- for twenty straight quarters during the past five years, yet our proposal has been ignored. In November 2011, we sent a letter to you and the Board of Directors and, six weeks later, received a response saying that you and the Board had “determined not to proceed with a Dutch tender offer” but would “continue to consider various potential paths to increasing shareholder value.” Following your response, we discovered that the high cost of a tender offer factored into the Board’s decision; therefore, we made an exceptional effort to introduce you and management to an investment banker who would execute the entire transaction for less than $500,000. Yet, here we are, two-and-a-half years later, and the Board of Directors at Actions has taken no meaningful steps to increasing shareholder value.
Since 2007, the company has missed opportunity after opportunity to substantially improve shareholder value via tender offers for large blocks of stock -- worth many millions of dollars in cash, for just pennies on the dollar; nevertheless, the Board continues to authorize an anemic SEC Rule 10b-18 stock repurchase program buying back only 3.2 million average shares annually. Moreover, rather than retiring repurchased shares, which is what creates the shareholder value, the company has turned around and reissued these shares as options to employees who, in turn, sell them back into the open market. This misuse of shareholder assets is unacceptable and untenable.
The time for analysis and contemplation of the Accretive Capital Partners proposal has long passed, and the time for immediate action has arrived. While the Board authorized an increase to the share repurchase program from 30 million to 50 million ADSs on May 6, 2014, only 27.5 million incremental ADS shares have been made available for repurchase under this authorization. At the current share price, this equates to only $47.3 million. We believe that the company should return at least $100 million to shareholders via an immediate tender offer, and we are no longer willing to wait patiently as the board disregards our consistent and clear message.
Let us examine the state of Actions Semiconductor today. As of March 31, 2014, we find the company holding $253 million ($3.71/share) of cash, cash equivalents and investments, total debt of roughly $41 million ($0.59/share), and tangible book value of $243 million ($3.57/share). Yet, despite healthy gross margins approaching 30%, the entire company is valued by the market at only $117 million ($1.72/share), an astounding 52% discount to tangible book value. The company's operating business is actually valued as a $126 million ($1.85/share) liability. Our company sits atop a mountain of unutilized cash, representing 76% of total assets; due to rampant distrust of the Actions Board of Directors, however, the market ascribes an incredulous 52% discount to tangible book value and an even more astonishing 45% discount to net cash and equivalents.
At today’s price, each share of stock purchased for $1.72 provides the buyer $1.72 of tangible value plus an additional $1.85 of “free” tangible value, equal to an instant 108% gain on investment. Rather than making this extraordinary investment on behalf of shareholders, the Board has directed 43% ($106 million) of the company’s assets into money market deposits and high-risk Chinese trust financial products earning 5.6% annually. In 2011, the Board authorized a $13.7 million investment in OCTT Holding Co., Ltd, a Mauritius private equity fund investing in other Taiwanese fabless semiconductor design companies, which turned around and invested 44% of its assets into Realtek Semiconductor Corporation, a company substantially owned and chaired by Actions Semiconductor Board Member Nan-Horng Yeh. This is an absolute and blatant conflict of interest and, given the Board’s refusal to pursue optimal investment opportunities on behalf of shareholders, one can only conclude that the motives of the Actions Semiconductor Board of Directors are not in the best interests of shareholders.
In addition to these misguided investment activities, the Board continues to support annual R&D expenditures approximating $26 million, or 40% of the $64 million on current revenue -- and a shocking 260% increase to the $10 million annual R&D expense just seven years ago, when revenue was $170 million. Assuming that $1 spent on R&D should generate at least $1 in future revenue, this program has cost shareholders more than $140 million since 2006. One can hardly argue that Actions needs more time to traverse the “path to increasing shareholder value” plotted by the Board, given the company has spent $17-$26 million annually on R&D for over five years, creating nothing but endless operating losses ranging from $13-$20 million annually. It is time for the Board of Directors to chart a new course to increasing shareholder value at Actions Semiconductor.
Optimal capital allocation is not simply a profitable investment; capital allocation decisions must be measured against risk-adjusted returns on alternative investments available to the company or its shareholders. When Actions has an opportunity to repurchase its own stock, doubling its cash per share and generating an instantaneous return on investment exceeding 100%, it is impossible to understand why the Board of Directors would choose to invest in risky Chinese trust financial products earning 5.6%, Taiwanese private equity funds, premium real estate projects, and disproportionate and ineffectual R&D expenditures.
Fortunately, an immediate opportunity lies in aggressively buying back stock at prices below net tangible assets of $3.57/share. I would like to direct your attention to calculations which demonstrate the extremely accretive nature of a $100 million share repurchase. We will explore stock buybacks at both 50% and 30% premiums to the closing share price on May 23, 2014, via a Dutch auction tender offer. While we recognize that roughly 27.5 million shares remain authorized under the current share repurchase program, we believe the company has ample resources to invest $100 million and to continue meeting working capital requirements.
By reducing the share count to 29.6 million shares through a $100 million repurchase at $2.58/share (i.e., 38.6 million shares, including $500,000 in transaction costs) funded by the abundant cash and equivalents currently held by the company, you will note that per-share tangible book value increases from $3.57 to $4.84 and that cash per share increases from $3.71 to $5.16. Moreover, these exceptionally accretive returns are achieved with a purchase price at an astounding 50% premium to the May 23, 2014 closing price of $1.72.
The figures only become more accretive as the premium is reduced. By investing $100 million to repurchase shares at a 30% premium to the current price, or $2.24/share, the share count would be reduced to 23.7 million shares, tangible book value per share would increase from $3.57 to $6.04, and cash per share would increase from $3.71 to $6.44.
The previous calculations do not take into account the premium that a strategic acquirer is willing to pay for a fabless semiconductor company like Actions. Demand for these companies is strong and continues to be bolstered by the Chinese Government's commitment to and activity in the space. In December 2013, China's Ministry of Industry and Information Technology announced the creation of a $5 billion fund with a focus on supporting the Chinese chip industry, and Ma Xianghui, Vice Bureau Chief of the Ministry's financial affairs, said China is exploring spending around 100 billion yuan ($16.3 billion) over an unspecified time period to create a national fund to support the chip industry. Over the past year, three notable acquisitions of Chinese fabless semiconductor developers have been made: On July 12, 2013, Tsinghua Unigroup Ltd., a solely state-owned limited liability corporation funded by Tsinghua University in China, entered an agreement to purchase Spreadtrum Communications Inc., a Chinese fabless semiconductor company for $31/share, or $1.78 billion in total equity value and $1.73 billion in total enterprise value; on November 11, 2013, the same Tsinghua Unigroup entered into a separate agreement to acquire RDA Microelectronics Inc., another Chinese fabless semiconductor manufacturer, for $18.50/share, or $910 million in total equity value and $802 million in total enterprise value; on March 10, 2014, Montage Technology Group Limited, the third Chinese fabless semiconductor company, received a letter from Shanghai Pudong Science and Technology Investment proposing an acquisition at $21.50/share, or $570 million in total equity value and $436 million in total enterprise value. The following table illustrates the significant sales valuation multiples ascribed to of each of these acquisitions:
The following scenarios demonstrate the value of Actions Semiconductor to a strategic acquirer: At a conservative multiple of 1 times sales (less than half the industry average), the implied value per share of Actions is $4.51, or a 162% premium to the current stock price. Using the average precedent transaction multiple of sales, the value of Actions shares is $6.14.
Were Actions to implement the proposed share repurchase, the share value increases dramatically: A $100 million share buyback at a 50% premium produces a conservative value (at 1 times sales) of $7.01/share; valued at the precedent transactions 2.72 times sales multiple, the stock would be worth $10.75/share. The same buyback at a 30% premium would increase the share value to $8.75/share, at 1 times sales, and to $13.40/share, at 2.72 times sales. Calculations may be found in the illustrations below:
We believe that the most important thing Actions can do on behalf of shareholders is to deploy our poorly-utilized cash into the highest yielding investment opportunity as soon as possible. Given the uninspiring results of capital allocation to risky Chinese trust instruments, conflicted private equity investments, and disproportionately large R&D staff -- coupled with the extraordinary opportunity to repurchase company stock, together with an unusually strong sellers’ market for Chinese semiconductor companies --we strongly encourage the Board of Directors of Actions Semiconductor to authorize a Dutch auction tender offer for no less than $100 million to repurchase shares, immediately; to retire all repurchased shares, so that shareholders may realize the value of the tender offer; to correct the blatant misuse of company assets, resulting from direct conflicts of interest among the company’s Board of Directors; and to begin to explore a sale of the company.
For more than six years Accretive Capital Partners has stood by Actions Semiconductor and waited patiently for a turn-around to materialize and for the long-term investment in R&D to result in profitable sales growth; unfortunately, this has not occurred. Accordingly, we encourage you to pursue our recommendations immediately, and we remind you of your fiduciary duties to shareholders: As custodians of our investment in Actions Semiconductor Co., Ltd., you are charged with a duty to place shareholder interests above any personal gain or other motives. And, consistent with the motivation that compels us, we demand only that you do the right and honorable thing on behalf of all Actions Semiconductor shareholders.
Richard E. Fearon, Jr.
Accretive Capital Partners strongly urges the Board of Directors of Actions Semiconductor to take the following steps on behalf of shareholders immediately.
Initiate a Dutch auction tender offer for no less than $100 million to repurchase shares.
Retire all repurchased shares so that shareholders realize the value of the tender offer.
Correct the blatant misuse of company assets, resulting from direct conflicts of interest among the company’s Board of Directors.
Explore a sale of the company.
An Open Letter to the Board of Directors of Actions Semiconductor Co., Ltd.