On April 12th,2012 MIPS (Microprocessor without Interlocked Pipeline Stages) shares surged as a rumor was released they hired Goldman Sachs (GS) to help sell the company and shares jumped over 25% in a single trading day. Since then shares have tapered off and are hovering between $6 and $6.50. There hasn't been a buy out as of yet so what is this increased share price representing? This is what my article plans to explain.
MIPS has a book value of ~$2 (Assets - intangible assets-goodwill), and its main source of revenues is from royalties of its 580 patents, with major customers including Google (GOOG), Oracle (ORCL), Cisco (CSCO), Broadcom (BRCM) and many others. Each of these patents has a future value between $500,000 and $1.5 million. Using $750,000 as a median one could value their patent portfolio at $435 million,$8 per share, and discounted back to present value to $185 million,$3.40 per share. This would give MIPS a current market value of $5.40 ($2 book value + $3.40 pv royalties) which is about where the stock was trading before the release of the sale of the company.
Upon the release of the rumor the stock price jumped to $6.40, or $1, so what does this $1 represent? This $1 could be representing the monetization of MIPS patent portfolio which CEO Vij stated back in January he was going to pursue. This $1 is a 12.5% of their patent portfolio, taking a lump sum payment of their future cash flows and increasing their share price roughly the same amount. Without knowing which of their 580 patents MIPS would be willing to sell and for how much, it is impossible to give an exact figure.
MIPS can now have 1 of 3 outcomes.
1. The efficient market thesis would tell us there stock price represents all known knowledge and MIPS will be selling 12.5% of their portfolio, which in turn should not move the market price much when the official announcement is made as this is what the market price is already reflecting.
2. The company will be bought out for $534,900,000 or $10 per share, its future value, and shares will increase all at once. This is possible since MIPS management is not allowed to comment on the buyout rumor we don't know for sure the outcome and according to the efficient market thesis this wouldn't represent all known knowledge. One of the most important factors MIPS has working in their favor is their enterprise value. With no debt MIPS has an enterprise value of $273,098,000 (EV=market cap+debt-cash & equivalents), or $5.10 per share. This is important because the acquirer will still have to pay the market price per share but they will acquire MIPS cash in the process which will lower their net price per share cost.
3. MIPS will fail to find a buyer and its stock will return to its past price around $5.40.
As we have seen before in our recent past, investing in buyouts can be a risky business. Take Pep Boys (NYSE:PBY) for example, upon their release of less than desirable earning on May 1st, Gores Group backed out of the deal and the stock price returned back to its pre-buyout position.
MIPS working closely with Google on the new Andriod with MIPS Ice Cream Sandwich software could be a good place for Google to buy the technology from MIPS in order to make them more efficient to compete with the Apple (AAPL) Ipad. As we can hint from Dell's (DELL) disappointing earnings release and Apples incredible numbers in Ipad sales, this is where the market is heading.
Another possible buyer is ARM (ARMH) who has 90% of the mobile software market and MIPS who is yet to break in strong to the mobile market. This could represent a good opportunity for ARM to acquire MIPS and secure their place in the mobile market.
With Advanced Micro Devices (AMD) shares dropping quick but insiders buying just as fast this could be a silent signal of something in the works and possibly with MIPS name on it.
MIPS Technologies, Inc. provides industry-standard processor architectures and cores for digital home, networking, and mobile applications primarily in the United States, Japan, the Pacific Rim, and Europe. The company licenses embedded processor intellectual property in the form of architectures and implementations. It develops and licenses industry-standard MIPS32 and MIPS64 instruction-set architectures, application specific extensions, core designs in synthesizable and process-optimized forms, and other related intellectual property to semiconductor companies and system original equipment manufacturers. The company also offers various embedded processors that scale across various markets in standard, custom, semi-custom, and application-specific products; and MIPS-Based Systems on Chips for embedded systems. Its technology is used in digital televisions, set-top boxes, Blu-ray players, broadband customer premises equipment, WiFi access points and routers, networking infrastructure and portable/mobile communications, and entertainment products. MIPS Technologies, Inc. owns approximately 580 patent properties worldwide on various aspects of its technology. The company was founded in 1984 and is headquartered in Sunnyvale, California.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.