Description

Two facts are facts:

1. The normalized multiple ("PE/10") applied to the S&P 500 was > 20x circa 2007.  (materially above-norm)
2. The ROE of the S&P 500 was 18% circa 2007.  Arguably, also a bit "above-norm."  (materially above-norm)

Regardless if we're in the ending-stages to a "recession" or a early-stages to a "reset" there are a few implication to the above facts:

(a) It's unknown where the market multiple will be in 2011-2013.

• If inflation (eventually) returns:

S&P 500 P/E and Inflation

CPI (Y/Y% change) --- P/E Ratio

<1% level --- 18.42x

1% - 3% level --- 17.14x

3% - 5% level --- 15.15x

5% to 7% level --- 12.50x

> 7% level --- 8.70x

Source:  BLS, Standard & Poor's, Thomson Financial, and Omega Advisors, Inc.

(b)  It's unknown where we corporate ROE will be in 2011 - 2013

• If inventory turns slow, interest rates increase, corporations deleverage, taxes increase, and/or margins shrink):

Five ways to improve earnings

Must we really view that 12 percent equity coupon as immutable? Is there any law that says the corporate return on equity capital cannot adjust itself upward in response to a permanently higher average rate of inflation?

There is no such law, of course. On the other hand, corporate America cannot increase earnings by desire or decree. To raise that return on equity, corporations would need at least one of the following: (1) an increase in turnover, i.e., in the ratio between sales and total assets employed in the business; (2) cheaper leverage; (3) more leverage; (4) lower income taxes, (5) wider operating margins on sales.

And that's it. There simply are no other ways to increase returns on common equity. Let's see what can be done with these.

Source:  "How Inflation Swindles the Equity Investor" by Warren E. Buffett, FORTUNE May 1977

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(c) In light of the above, Seth Klarman's quote remains relevant: "We worry top-down, but we invest bottom-up."

(d) If history is any guide, LDIS should should provide a satisfactory risk-adjusted return, regardless of how (a) and (b) above ultimately evolve. 

• Leadis Technology (LDIS) is not dissimilar to recent Value Investor Club reports for Footstar Inc., and Soapstone Networks Inc.
• A few other similar situations for further case study:  Neurobiological Technologies Inc.and EDEN Bioscience Corp.  

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A Play-by-Play Review of the Special Situation facing Leadis Technology: 

In 2006...

Faced with the prospect of continuing declining margins for our core display driver products, we embarked on a plan to (i) focus our display driver business on advanced technology and (ii) diversify our business beyond display drivers into synergistic markets.

• Beginning in 2007, we began developing LED drivers and touch sensor products for the consumer electronics markets, and mobile phones in particular. In February 2007, we acquired Mondowave Inc., a privately-held developer of portable audio components, and in December 2007, we acquired Acutechnology Semiconductor, Inc., a privately-held provider of power management IC products. Collectively, these actions significantly expanded the scope of our operating activities and the range of products we could offer.

For 2008... we set three primary goals:

(i) return to quarterly sequential revenue growth with improved operating margins; (ii) re-establish the Company as a supplier of high-performance display driver products; and (iii) establish the Company as a provider of high-performance analog and touch sensor products.

• At that time, we anticipated that continued growth in sales of our display driver solutions, resulting from design wins that we secured in 2007 and early 2008, would provide the necessary revenue base to support the broader research and development expenses associated with our diversified operations. Several display driver programs with Tier-1 customers, however, did not ramp in the first half of 2008 as anticipated, and forecasts from these customers remained below previously projected levels for the remainder of the 2008 fiscal year.

• In mid-2008, we began to focus on the preservation of our cash levels as revenue from sales of display driver products was not sufficient to offset the cost of research and development in the increased number of product areas. Our Board of Directors met to consider strategies to address our continuing financial losses and the potential impact of the worsening global economic climate on our business and operations, and determined that the prospects for our business were likely to continue to deteriorate due to continuing declines in demand for our core display driver products, and our likely continued difficulty in competing and realizing a profit as a small public company.

Between June 12, 2008 and December 31, 2008..., our Board met more than ten times and considered several alternative strategies for the Company, including:

(i) continuing current operations; (ii) making a sale or other disposition of all or part of the Company or its business; (iii) a "going-private" transaction; and (iv) an immediate shutdown and liquidation of the Company.

• In August 2008, we retained ThinkEquity LLC to provide financial advisory services to the Company and the Board of Directors with respect to strategic alternatives. ThinkEquity is a full-service, privately-owned investment bank experienced in providing advice in connection with merger and acquisitions and related transactions. Prior to this engagement, ThinkEquity had not provided any financial services to the Company. ThinkEquity conducted due diligence and provided analyses and other information related to the Board's consideration of these strategic alternatives.

• With the assistance of ThinkEquity, we initially focused on the sale of its audio products business. The With the assistance of ThinkEquity, we contacted over 20 potential suitors for the audio business between August and November 2008. We received several non-binding indications of interest from parties regarding the potential purchase of the Company's audio business. In November 2008, we believed we were close to reaching a tentative agreement with a party to purchase our audio business. In late November, however, this party pulled out of negotiations to purchase the audio business based on overall economic conditions and that party's own efforts to reduce its operating expenses. Following the withdrawal of this potential bidder from the process, we ceased further investment in our audio business, except as necessary to support existing customers, and continued to look for additional bidders.

• While we initially focused primarily on the sale of our audio business, we received interest from other parties in acquiring other parts of our business. In addition to the pursuit of a sale of the audio business or other parts of the Company, during the second half of 2008 our Board of Directors and management also re-examined our product development strategy to examine whether we would have sufficient resources to allocate to our most promising businesses. As economic conditions further deteriorated in the latter part of 2008, we took actions to restructure our operations and reduce spending, including a reduction in our headcount.

In December 2008, our Board of Directors held meetings to discuss potential strategic alternatives in light of the worsening global economic conditions, our financial position and estimated financial results for 2009, the value proposition of each of our product lines, operating risks facing the Company, and other factors. In light of the challenges we faced, we continued to actively pursue strategic sales of parts of our business as well as other ways to reduce our overall operating expenses. As a result of these activities, we contacted or was contacted by more than 30 parties, including those parties contacted as part of the proposed sale of the audio business, regarding potential strategic transactions involving the Company's business. These continued discussions resulted in several transactions over the first eight months of 2009:

In January 2009, we sold certain of our display driver assets and transferred certain employees to AsTEK, Inc., a privately-held company located in Korea. The consideration paid was $3.5 million in the form of a non-interest bearing receivable due no later than January 2010 plus $0.5 million of assumed liabilities. The cash consideration has yet to be received, and the associated receivable carries risk of non-payment. To maintain the Company's revenue levels while we continued to pursue strategic alternatives, we retained all but one of the display driver products that was then in commercial production. We also retained ownership of our proprietary EPiC^TM technology for AM-OLED displays. As a result of this transaction, we ceased further investment in the development of new display driver products, significantly reducing our operating expenses.

In February 2009, we sold certain assets relating to one development-stage power management product to a publicly-traded supplier of analog and mixed-signal semiconductor products. Under the terms of the transaction, we were paid $2.3 million in cash for the assets, all of which has been received. In connection with this transaction, we ceased development of new power management integrated circuits.
 

In March 2009, we sold assets related to our audio business and transferred certain employees to a publicly-traded supplier of semiconductor products for consideration of $1.45 million in cash, all of which has been received.

In June 2009, we sold assets related to our touch sensor products and transferred certain employees to a publicly-traded supplier of semiconductor products for consideration of $6.25 million in cash, all of which has been received.

On August 15, 2009, we executed an Asset Purchase Agreement with IXYS CH GmbH for the sale of assets related to our LED driver and controller business and three of our legacy display driver products. This transaction was completed on September 14, 2009. The cash consideration for the assets was $3.5 million plus approximately $569,000 for product inventory and other related assets that were transferred at the closing of the transaction, of which approximately $3.2 million was paid at the closing and $875,000 is payable in March 2010.

As a result of the foregoing transactions, the Company's business currently consists of several legacy display drivers products and approximately twelve power management products. Collectively, these products generate only modest revenue. The Company also continues to hold intellectual property rights to its proprietary EPiC^TM technology for AM-OLED displays. The Company is not actively developing any new products.

At a meeting held on September 10, 2009:

• In light of the pending completion of the Company's transaction with IXYS, our Board of Directors again discussed different strategic alternatives available to the Company, including a voluntary dissolution of the Company.

At a meeting on September 15, 2009, our Board of Directors continued its earlier discussions regarding the voluntary dissolution of the Company.

• After discussion of the legal benefits and risks and the potential timing and costs of the strategic options available to the Company and, upon consideration of the Company's financial situation, business prospects, and the continued challenging economic climate, our Board of Directors determined that the voluntary dissolution and liquidation and winding up of the Company under Delaware law is advisable and in the best interests of the Company and its stockholders, approved the Plan of Dissolution and recommended the Plan of Dissolution for approval of the stockholders.
• It was noted that the Plan of Dissolution could be abandoned by the Board if a more attractive transaction became available to the Company.

(adapted from SEC filing dated September 21, 2009)

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Bottom line:
 

We currently estimate that, if we are able to dispose of substantially all of our non-cash assets, the aggregate amount of all liquidating distributions that will be paid to stockholders will be in the range of approximately $0.93 to $1.20 per share of Leadis common stock.

Specifically: 

Estimated Liquidating Distributions to Stockholders

(in thousands, except per share amounts)

Notes:

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With the following takeaways:

Likely Cash Proceeds:  Total likely above $1.00; Initial distribution presumed to be in mid-seventy to low-eighty cent range - surely below $0.87

As of August 31, 2009, we had approximately $28.6 million in cash and cash equivalents. In addition, we received approximately $3.2 million on September 14, 2009 in connection with the closing of the sale of certain assets to IXYS Corporation. In addition to satisfying the liabilities reflected on our balance sheet, we anticipate using our cash during the liquidation process for a number of items, including, but not limited to, the following:

• ongoing operating, overhead and administrative expenses;
• purchasing a director and officer liability insurance policy as well as a "tail" insurance policy for periods subsequent to our filing of the Certificate of dissolution;
• employee severance payments;
• expenses incurred in connection with our dissolution and liquidation;
• resolution of lease and other contractual obligations;
• resolution of pending and potential claims, assessments and other obligations; and
• professional, legal, tax, accounting and consulting fees.

Per the Estimated Liquidating Distributions to Stockholders table, looking at:

• Approximately $23.8 million in cash and cash equivalents and approximately $4.8 millionin short-term investments.  $0.94 per share.
• Approximately $2.15 million to $3.4 millionof total liabilities and reserves .  $0.07 - $0.11 per share.

Above suggests high range of initial distribution, in theory, around $0.84 - $0.87 / share

Below suggests incremental distributions, in theory, around $0.18 to $0.39 / share (...with optionality)

• Approximately $3.14 millionin proceeds from sale of assets to IXYS Corporation  $0.10 per share.
• Approximately $2.32 million to $8.76 million in non-current assets. $0.07 to $0.29 per share.

With the footnote: 

"Due to the uncertainty of the value of our intellectual property, we have not included the value of intellectual property in Non-cash assets."

Likely Timeframe:  End of 2010

• We currently anticipate that the majority of the remaining proceeds from the liquidation would be distributed before the end of 2010, and that any additional proceeds would be distributed by way of a final liquidating distribution, either from the Company or the Liquidating Trust, within three years after the approval of the Plan of Dissolution. However, if we are unable to sell our non-cash assets, if the proceeds of the sales of our non-cash assets are less than anticipated, if we are unable to settle or otherwise resolve existing claims for the amounts anticipated or if unanticipated claims are made against us, distributions to stockholders may be delayed and made over a longer period of time. The ultimate nature, amount and timing of all distributions will be determined by the Board or the Trustee, in its sole discretion, and will depend in part upon our ability to convert our remaining assets into cash and pay and settle our remaining liabilities and obligations.  (Source:  Company SEC filing)

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Disclaimer  This is not a solicitation to buy or sell stocks. Please do your own independent analysis before buying or selling LDIS (or any other stock). We have a long position in LDIS at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on our LDIS buying or selling activities.

Catalyst

A Special Meeting of the Company's stockholders will be held at the Company's offices located at 800 W. California Avenue, Suite 200, Sunnyvale, California, 94086, on October 23, 2009 at 9:00 a.m., local time to consider and vote upon the proposal to approve the Plan of Dissolution.