Immersion: Activist Funds vs. Long-Term Potential and the Impact on Company's Stock

by: Paolo Gorgo

Time to survey recent developments at Immersion Corporation (NASDAQ:IMMR) since our last update.

On December 29 Ramius, an activist fund, nominated three directors for election to Immersion’s board. Two existing directors, John Hodgman and Emily Liggett, are serving for a term expiring in 2011. Back in December 2009, Ramius had questioned the company’s decision to reduce the size of the board so that only one director was up for election, an issue also raised at the 2010 annual meeting. In the event only two directors are put up for election by the Company at the 2011 annual meeting, as it seems, Ramius stated it will withdraw one of its nominees.

The indemnification letter agreement between Ramius and two of its candidates to the board of directors is interesting, as it may shed some light on Ramius' real intentions (emphasis added):

Pursuant to the Compensation Letter Agreements, each of Messrs. Barron and Traub agreed to use such compensation to acquire securities of the Issuer (the “Nominee Shares”) at such time that Messrs. Barron and Traub shall determine, but in any event no later than 14 days after receipt of such compensation. If elected or appointed to serve as a director of the Board, each of Messrs. Barron and Traub agreed not to sell, transfer or otherwise dispose of any Nominee Shares within two years of their election or appointment as a director; provided, however, in the event that the Issuer enters into a business combination with a third party, each of Messrs. Barron and Traub may sell, transfer or exchange the Nominee Shares in accordance with the terms of such business combination.

If elected, Ramius nominees will have to invest their compensation into Immersion's shares, which is in line with Ramius criticism of the BoD (the concern that the board lacks a vested interest in the financial performance of the company has already been expressed in a few public occasions by Ramius). The agreement, however, also makes it clear that nominees may have an economic incentive at putting the whole company for sale, which is in line with Ramius strategy in similar undervalued situations.

On December 30, Dialectic Capital, another activist fund, also nominated two different individuals for election to Immersion’s board at the 2011 annual meeting. On January 10 Dialectic Capital disclosed a 5.2% ownership stake in IMMR.

Ramius, on the other hand, reduced its stake to about 8% of the company, having cut its percentage almost in half in the last few months, a strange move for someone pushing for a more active role in the company. From a financial point of view, there is no doubt that Ramius has already made a good deal investing in Immersion, as its shares were sold at a price about 50% higher than its average cost.

With two activist funds apparently pushing for the sale of the company, Immersion might soon become an interesting play for traders. However, if we forget about the elephant in the room, there are also interesting developments that bode well for the long term targets of the company.

Immersion has recently been relatively quiet, only recently issuing a press release announcing a patent milestone.

There was no direct news out of CES, the world's largest consumer technology tradeshow, where several Immersion's licensees introduced new models that incorporate Immersion’s technology.

Samsung (OTC:SSNLF), in particular, announced a new touchscreen player, and revealed that it already sold 10 million Galaxy S Smartphones. Its tablet is also performing very well.

The presentation for the Samsung's P3 player is worth a short quote:

... a wide screen that let's you know you've been heard when you touch it.

With the P3 your videos and music aren't the only things you'll be touched by. Put your finger on the P3's wide touch screen and you get a reassuring touch right back. It's called a HAPTIC sensor. Drag your finger across the wide screen and you feel a light click. Scroll and feel a mild rumble. You can even synch the vibration to your music and videos by turning on the Vibe Woofer. No matter how you use the P3, the vibe is always good.

LG (OTC:LGERF), on the other hand, eyes a four fold increase in smartphone sales, which also bodes well for Immersion.

Management recently made a presentation at the 13th Annual Needham Growth Conference in New York, where it highlighted some data worth reporting.

In 2009 Immersion's partners sold about 75 million phones incorporating the company's haptic effects. This represented about 20% of the total touchscreens phone market. This number might increase to roughly 100 million phones in 2010, although official numbers are not out, yet. From the trend, and the number of new product wins announced, it would seem that Immersion is also growing its market share, trending toward reaching a 30% of all touchscreen phones sold.

By the end of 2010, there should have been about 200 million phones sold with haptics. This is interesting, as Immersion, in the past, had talked about potential additional revenues generated by gaming on touchscreens. As a critical mass is slowly building, there might be chances that gaming companies might consider incorporating haptics in their games, also as a differentiator from competition. May be wishful thinking, may be not – as games and applications for touchscreens become more popular, a large potential audience can not be ignored.

Vic Viegas, Immersion's CEO, mentioned this gaming market again at the Needham Conference, although no timing for generating revenues was mentioned.

Talking about potential future developments, haptics is also included in a recent Visteon (NYSE:VC) concept car called “Growth market car” - a collaboration between Visteon and 3M (NYSE:MMM), another Immersion's licensee.

If you would like to investigate the long term potential for haptics, you may enjoy this PC World article: "Will Touchscreens Kill the Keyboard?"

Thanks to a handful of emerging technologies, virtual touch-screen keyboards are getting closer to the feel of real electromechanical keyboards. Enhancements such as tactile feedback and surfaces that change to mimic physical keys could eventually redefine the virtual keyboard experience for millions of users of devices ranging from smartphones to tablets and touch-screen PCs. Will these improvements be enough for the virtual keyboard to entirely displace the electromechanical keyboard?

Immersion Corp., which has developed a product that uses a mechanical actuator to deliver haptic feedback on a touch screen, says the next generation of haptics will be able to replicate the feel of key travel as well as the keyboard click of a mechanical keyboard. "You don't get the actual travel of your finger, but you can get much more of it back," says Dennis Sheehan, Immersion's vice president of marketing.

Immersion is working on an innovation that could help. The company is collaborating with partners to develop "deformable surfaces" that would allow certain areas of the touch screen to rise up, creating key positions you can feel.

"When electric fields are applied to them, they deform - raise up or sink down. Those surfaces would be on top of the touch-screen display," says Sheehan. So this could help users position their fingers by feel. But don't expect products anytime soon: Sheehan describes the work as part of the company's "long-range vision."

The strategy of focusing on the most advanced and demanding vertical (mobility), even though it carries low royalties per unit, might pay off in the long term, as other verticals follow the lead and Immersion gets more and more exposure thanks to the visibility gained because of its presence with the main leaders in the mobile space.

Haptics needs to become part of our daily experience to be felt as a “must have," and mobile phones are, today, in everybody's hands, all over the world.

We decided to make some channel checks with different verticals to check how haptics is perceived in commercial or industrial applications.

A worldwide leading company active in the fitness equipment sector we contacted commented that touch screens, in these applications, are still a generation behind mobile phones, who are leading innovation. They may be watching, but they are not ready yet. The approach is “if it's not there you can't break it," and you have to prove reliability to them before they may see the advantage side of implementing haptics. They won't be first movers, but they might be followers watching other sectors like mobility.

Further to Immersion's PR issued about the Tastitalia partnership, we contacted Paolo Accattoli, VP Research and Innovation, who kindly accepted our invitation for a phone interview about his company and the development made possible by this agreement with Immersion Corporation. We believe his words give us the opportunity for a few comments about the commercial and industrial segment.

Q: Can you briefly introduce us to Tastitalia?

Paolo: Tastitalia srl is a dynamic industrial presence with a unique prestigious position in the national and European market, in the MMI field (Man-Machine Interface). With about 70 employees, and revenues of about € 7,000,000 ($9.5 million) a year, we source about 90% of our components abroad and sell roughly half of our products in Italy, with Europe representing our main export market.

Q: When did your relationship with Immersion start?

Paolo: About three years ago, we started considering incorporating Immersion's technology into our products. I believe we were the first European company to do so – our company has always been a pioneer in new technologies and we thought that haptic could represent a compelling value for our products. We approached Immersion and were granted a non-exclusive license. They recognized that our 25 years experience in the market represented a great opportunity also for them.

Q: Which is the product range that you are using from Immersion?

Paolo: For our products, it is mostly the TouchSense 1000 serie. Our industrial applications are often represented by a combination of a touch screen with a separate keyboard, used for for repetitive keys.

Q: Can you tell us a bit more about the cost of implementing haptic into your products and the market reaction to it? Royalties for the Touchsense 1000 should be in the dollar range per unit, and not a few cents as in mobile phones.

Paolo: Yes, that's roughly the range for the royalties. The cost of implementation, that also includes the need for actuator, etc., isn't very relevant, as it increases the price of the final product about 5% to 10% - we must obviously assume that the market recognizes that there is an added value in having haptics, and we mainly target a harsh environment where a sealed surface is a must, that being automotive, aerospace or medical devices.

It is also about productivity, as an unmistakable confirmation in a noisy or distraction work place may help faster and more accurate data entry.

A brief presentation of our Tasthaptic products is available at this link.

Q: Do you see any real competition in the marketplace?

Paolo: Not really. There may be other ways to get a haptic effect, but Immersion is the only company that can offer 46 different effects in touch screen the size of up to 15', and its strength is the quality and variety of these effects and the software and ease of implementation. Other companies may offer something that is not really overlapping, but complementary to Immersion's offering.

Q: How's the market response so far?

Paolo: Although touch screens represent today a small part of our volume, we have no doubt that the trend toward implementing more and more touchscreens even in the workplace is irreversible.

Haptics is still in its infancy, but we feel positive about the development of its implementation into touchscreens and the potential revenues that TastItalia may generate by including this differentiated product into our offering.

(End of Interview)

A few comments may be useful to put these words into the right perspective for Immersion's investors – and there's good and bad news.

Tastitalia's partnership probably will not represent a large revenue stream for Immersion, at least in the short term. It is certainly due to the size of the partner, but the other bad news is that the industrial and commercial markets still seem in the introduction phase for haptics.

However, it is interesting to learn that Immersion has been able, since the beginning of its activity, to be recognized as an pioneer and a leader in its field by other innovative companies, thus attracting licensees through “word of mouth” - as in this case, where the business lead was basically created by common suppliers of components. Putting together other “evangelists” as partners is key to opening new markets for Immersion.

Another interesting comment was about pricing: As long as the haptics experience is recognized as “valuable” for the application it must support, it sounds that cost doesn't represent a real obstacle to its implementation in industrial and commercial devices.

To summarize, and we should probably say as usual with Immersion, a lot of patience seems to be a virtue needed to be an investor in this company, while the different markets targeted by the company mature and reach an inflection point at different stages.

Investors who don't like this long term approach, which also requires strong execution by the management team and patience, might prefer following the Ramius and Dialectic Capital approach, and look for a sale of the company to an interested party.

Is it activist funds vs long term potential? In both cases, Immersion's share price performance might be headed positively in the future.

Disclosure: I am long IMMR.