‘Investors don’t understand’

Published in the Ottawa Business Journal newspaper and website.
Oct. 8, 2007

Click here to view this article on OttawaBusinessJournal.com.

Insiders, analysts say MOSAID’s stock undervalued because of market’s confusion

Have MOSAID Technologies Inc. and its new management broken their promise to deliver better results for shareholders, despite a painful restructuring process that included the ousting of several top executives and the layoffs of almost three-quarters of its staff?

It’s been more than a year since the epic public proxy battle between MOSAID and U.S.-based investment firm Loeb Partners Corp., a fight for control which has resulted in a narrowed focus on MOSAID’s biggest money-maker – its patent licensing business – and the divestiture of its two other divisions.

Loeb Partners, which had sharply criticized MOSAID’s management and argued that the company could do much better, brought in three new directors, a new CEO, board chairman and chief financial officer (see sidebar).

TIMELINEAug. 16, 2006
Disgruntled MOSAID shareholder Loeb Partners demands that the company be sold immediately or face a proxy process to replace some of its directors.

Sept. 7, 2006
Loeb Partners Corp. announces it plans to replace three of MOSAID’s non-management directors with its own nominees.

Sept. 22, 2006
MOSAID’s AGM is delayed by an 11th hour deal that sees its board expanded to make room for Loeb’s nominees.

Feb. 23, 2007
MOSAID announces sale of automatic test equipment (ATE) business for $20 million to Massachusetts-based Teradyne Inc., cutting its workforce to 57 from 116.

March 1, 2007
MOSAID buys 20 wireless technology patents for $20 million.

April 9, 2007
Long-time CEO George Cwynar is replaced by John Lindgren. Chairman Thomas Csathy and CFO Richard Boadway are also ousted. ARC International CEO Carl Schlachte becomes the new chairman of the board (VP of finance Joseph Brown is later promoted to CFO).

July 16, 2007
MOSAID sells off semiconductor IP business for roughly $15 million US to California’s Synopsys Inc., with 20 more staff moving on to jobs at the new company.

Sept. 7, 2007
MOSAID’s share price falls to a low of $18.01.

But despite promises that the company’s new direction would bring much-improved shareholder value, MOSAID’s stock has fallen by about 32 per cent in the past year, dropping to a 52-week low of $18.01 in early September.

Analysts and the company’s management say the share price doesn’t reflect MOSAID’s true potential.

“Based on the stock price, you could say that the outcome (of the proxy fight) did not have the desired effect,” says BMO Nesbitt Burns analyst Brian Piccioni. “But we have a ‘buy’ rating on the stock … The existing business has its benefits; they have tremendous leverage with any deals signed. But it had better work out because the company has nothing to fall back on.”

He adds: “There are negative vibes in general (surrounding the patent licensing industry) because people think the U.S. is going to radically change patent law, but I don’t think it’s going to change too much. There’s a lot of confusion about this sort of stuff.”

Mr. Piccioni is referring to a recent U.S. Supreme Court decision to invalidate patents for incremental developments in technology which are obvious to the average person, as well as another ruling reducing the number of claims and patent continuation applications that patent holders can file on protected inventions.

With the second decision, patent holders are no longer allowed to file unlimited continuation applications, each with slight variations in the descriptions of the technology’s characteristics. Instead, they can now file only two applications, making it riskier for patent holders since they have fewer chances to ensure that the language of the application covers every aspect of the invention which might be infringed upon.

MOSAID’s chief executive John Lindgren says the rulings have exerted downward pressure on all companies in the patent licensing sector.

But the company has plans to boost its share price, having recently started a buy-back program to purchase up to five per cent of MOSAID’s outstanding shares on the market.

“It will help the stock immediately, and … we need to prove we can monetize the patent portfolio,” says Mr. Lindgren. “It will put off fears with the legislative environment … as long as they see we can still deliver with a cloud of patent reform around us.”

Mr. Piccioni acknowledges that MOSAID has good prospects, but says part of the challenge for the company is getting new licensees for its patents, especially in its new wireless portfolio.

“Just because they have the patent doesn’t mean it will have any value,” he says, noting that nobody has licensed MOSAID’s recently acquired portfolio of 20 wireless patents, and it could take years before they find an interested client.

The company has other problems, Mr. Piccioni adds.

“Its memory business has been lucrative and delivered substantial amounts of revenue to the company, but assuming they ultimately manage to come to terms with all the guys they’re suing in Texas, they’ll have substantially licensed all of the memory industry, with only tiny bits left,” he says. “How do you get money once you’ve licensed everyone? They’ve bought the wireless patents, and there is potential there, but it remains to be demonstrated that that potential can be fulfilled.”

Meanwhile, Heywood Securities analyst Dev Bhangui, who covers the patent licensing space but does not follow MOSAID specifically, comments that Canadian investors often don’t understand that these firms extract value from their portfolios over a period of several years, not months.

“I see a lot of fluctuations in market value because investors do not understand how the business model operates. They have near-term expectations, and then these get flamed. The valuation is much more volatile than it should be,” he says. “People see that XYZ company has bought $30 million in patents and buy a lot of stocks, but the day the company harvests is when the value should be going up, not the day they buy the patents. People are playing on the hype as opposed to the time and value harvested, and people who make money, make it by coincidence.”

Both analysts agree there’s a lot of misinformation about the patent licensing industry, a challenge which MOSAID must overcome if it wants to win investors’ hearts and chequebooks.

“Canadian investors do not understand (the industry), and they have to get educated, but no one’s doing this,” Mr. Bhangui adds.

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