Contact: Brenon Daly
In the third-quarter earnings report for Silicon Storage Technology at the end of October, chief executive Bing Yeh went out of his way to tout the vastly improving outlook for the flash memory vendor. Yeh noted that end-market demand had recovered and pricing had firmed up in what had been a pretty tough market. Third-quarter sales picked up sequentially and the company actually posted black numbers after three straight quarters of losses. The rebound was expected to continue in the fourth quarter, with a profit forecast for the period, as well.
And yet, the price that Yeh and his buyout partners at Prophet Equity bid for SST last week is actually lower than the vendor’s share price on the day Yeh made his comments about the rosy outlook for the company he heads. In fact, over the past two months, shares of SST have only traded below the proposed sale price of $2.10 in 11 of the 46 trading days. Looked at another way, the proposed management buyout (MBO) of SST represents a ‘take-under’ (rather than a takeover) when compared to the closing price in three out of four sessions since early September.
By their very nature, MBOs are fraught with conflict. In cases like SST, where executives plan to roll over their stakes in the company, the executives are effectively both buyers and sellers of the firm. (According to SST’s proxy, Yeh holds roughly 11% of all shares, making him the single-largest owner of the vendor.) The conflict emerges when we look at the basic economic self-interest on both sides of the transaction: The owners of SST (including Yeh) want to get as high a price as possible in the sale of their business, while the buyers (including Yeh) want to pay as low a price as possible to purchase the business.
Beyond the mismatch of motivation in MBOs, there’s also the thorny issue that executives almost certainly have insights on their business that aren’t available to other owners. We would guess that Yeh, who helped found SST 20 years ago and also serves as the chairman of the company’s board, probably knows more about the firm’s business and its prospects than anyone else on the planet.
At least one other insider at SST, however, didn’t share the support of the below-market MBO. Board member Bryant Riley, the founder of the Southern California investment firm B. Riley & Co., voted against the proposed buyout and then resigned from the board. (It’s worth noting that Riley got his seat in May 2008 only after agreeing to stop pestering the company about ‘strategic alternatives.’) Most SST investors – at least those who don’t stand to have a stake in the privately held company – have also voted against the deal. Shares have traded above the offer price since the bid was revealed November 12.