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Activist hedge fund Chapman Capital, which claims to own 1.5 million shares or just over 1% of Cypress Semiconductor (NYSE: CY), sent a letter to Cypress Semi's board recommending steps the company should take to reorganize. First, Chapman argues Cypress should split-off its controlling stake in SunPower (Nasdaq: SPWR). Second, Cypress should consider a private LBO transaction of its core semiconductor business.

According to Chapman, this past fall Cypress engaged Credit Suisse to represent it in LBO discussions that valued Cypress Core at $1.8-$2 billion. Based on this valuation, Chapman claims the stock should be worth $22 per share, which compares favorably to the current market price of around $16. Taking into account Cypress' existing cash balances, Chapman continues, one could argue that Cypress Core now trades at nearly the same value it did when it went public twenty years ago. Chapman states further that "given the salubrious environment for private equity capital and relatively healthy stake of the Cypress Core business, there is a strong argument to be made that striking while the iron is hot is readily applicable to a Cypress Core LBO."

Chapman claims to be "investors and not speculators associated with Cypress" -- indicating a long-term commitment. However, Chapman also states that it plans to hold founder T. J. Rodgers to his promise that "you and I are going to make as much money as fast as we can on this."

Related: Robert Chapman Urges Cypress To Spin Off SunPower, Do LBO, Cypress Semiconductor: Undervalued and Very Appealing, Focus on SunPower: A Clearly Successful Spin-off

Cypress Semiconductor and SunPower 1-Yr Charts
Cypress Semiconductors 1-Yr Chart 1-2-07 SunPower 1-Yr Chart 1-2-07

Source: Cypress Semi Urged to Split-Off SunPower and Consider Core LBO