Why You Must Vote For The ChipMOS Merger

| About: ChipMOS TECHNOLOGIES (IMOS)

Summary

The current structure wastes cash and hobbles the company's prospects.

The deal provides a fair premium on the shares sold to ChipMOS Taiwan.

No better deal is likely, and rejection will needlessly waste time and money.

Every vote is needed to ensure passage of the proposal. Vote now.

On August 12th at 9:00 A.M. (Taipei time) ChipMOS Taiwan will hold its annual shareholder meeting. It is at this meeting (or technically before this meeting, when votes are tallied after 11:59 P.M. New York Time on August 10th) that the fate of the holding company ChipMOS Bermuda (NASDAQ:IMOS) will be decided. It is imperative that you vote in favor of the proposal to merge the operating and holding companies.

The elimination of the ChipMOS Bermuda holding company is a long-awaited development that I first wrote about three years ago. If the proposal passes here is how it will work:

ChipMOS Bermuda owns 522,080,358 shares (60.0%) of ChipMOS Taiwan (8150 on the Taiwan Stock Exchange). It also has $50.9 million in net cash after obligations in options and share appreciation rights granted to management. ChipMOS Taiwan will buy 11,485,562 shares of ChipMOS Taiwan from ChipMOS Bermuda for $50.4 million. Shareholders of ChipMOS Bermuda will receive ADSs of ChipMOS Taiwan in exchange for the remaining 510,594,796 shares of ChipMOS Taiwan. An ADS will be exchangeable for 20 shares of ChipMOS Taiwan, and each share of ChipMOS Bermuda will be exchanged for .9355 ADSs and $3.71 in cash.

In a separate and unrelated transaction, ChipMOS Taiwan seeks to do a private placement with Tsinghua Unigroup for 299,252,000 shares of ChipMOS Taiwan (25.8%) at NT$40 per share.

Benefits Of The Merger

ChipMOS Taiwan is buying 11,485,562 shares for $50.4 million. Those shares currently trade at NT$32.35 each, and with an exchange rate of NT$31.56 per USD, they are only worth $11,773,064, so they are purchasing these shares at 4.28 times their market value.

ChipMOS Taiwan pays an annual dividend, and this dividend is subject to a 20% withholding tax by Taiwan. This money is lost. After the merger, US shareholders will be able to claim a tax credit (for taxable accounts) to reclaim this money.

ChipMOS Taiwan is trading at a level equivalent to $22.89 in the US, 31.25% higher than the price in the US of $17.44. If US shareholders own ADSs of the Taiwanese stock, US shares can be freely converted to Taiwanese shares, so there should be near-parity between the two. It could be argued that we will see the Taiwanese stock drop rather than the US stock rise, but remember that ChipMOS will do a private placement for a quarter of the company at NT$40 a share if the Taiwanese government permits it. This is significantly above the current Taiwanese price of NT$32.35.

The ownership structure of the company is convoluted which creates a huge hurdle for any entities interested in acquiring the company. Simplification of this structure might bring interest from private equity or from other companies.

Dangers Of Rejection

Without approval, we will continue to see an attrition of value. Cash will leak out of the company from tax withholding on the annual dividend from ChipMOS Taiwan. We will continue to pay for board members that have proven themselves to be quite useless. We will continue to pay exorbitant audit fees for a holding company (approximately $925,000 at the current exchange rate in 2015, $687,000 in 2014). ChipMOS Bermuda and ChipMOS Taiwan will pay additional fees to Wells Fargo and Credit Suisse for advice on the merger.

For as long as this merger is pending, further buybacks in either the US or Taiwan are difficult or even impossible. One of the primary complaints that shareholders have had are inadequate buybacks while the company was valued very cheaply, and this won't be rectified for as long as the merger is incomplete.

What is required for approval of the proposal?

70% of shareholders must vote in favor to approve it. That's quite a large number, and it means that apathy alone may be enough to prevent the merger. Your vote may be the one that would put the proposal over the top.

Why not vote against it and negotiate a better deal?

This is not a realistic outcome. My fund has voted for the proposal, and every fund that I have spoken with has voted for the proposal. It's estimated that 30% of the vote will be "yes" due to passive voting by hedge funds solely from the recommendations of Institutional Shareholder Services and Glass Lewis. There is overwhelming support for the deal, so the company has little incentive to renegotiate.

What happens if too few shareholders vote and the necessary 70% "yes" level is not surpassed?

Proposal 5 is to adjourn if too few "yes" votes are received, but "yes" votes exceed "no" votes. The company would then go out to try for more votes, and this process would take at least several months. Only 50% of votes are necessary for proposal 5 to pass, and this will almost certainly be reached. Proposal 5 would put us back in limbo, wasting time and money, and there would be no renegotiation, only a delay of what is likely inevitable. If you would otherwise consider not voting, or voting against the merger in protest, you should instead vote in favor to prevent this outcome.

Conclusion

The merger of ChipMOS Bermuda and ChipMOS Taiwan has been in process for years now and it's seemed that it would never arrive. Finally, it will. While it may not involve as much of a cash payout as some investors hoped, it's a fair deal that provides a number of benefits, and eliminates some of the waste inherent in the current holding company structure. With a 70% requirement, every vote is important. Do not abstain, do not vote against, and if you've already voted against it's not too late to change your vote. Voting will end before the meeting is held on the 12th, and the quickest and easiest way to vote is to call 877-777-8133. When I called I was able to vote multiple accounts in about a minute. Call today.

Disclosure: I am/we are long IMOS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.