Starboard wants to control the board of DSPG

27 May, 2013

The aggressive Hedge Fund is holding 10.1% of the company's common stocks. "Starboard's presentation is a clever combination of distortions and deceptions that misrepresents its true intentions"

“Starboard’s presentation is a clever  combination of distortions and deceptions that misrepresents the hedge fund’s true intentions”

Eli Ayalon, DSPG Chairman
Eli Ayalon, DSPG Chairman

The fabless semiconductor provider, DSPG Group from Herzlyia, Israel, is facing a new round of power struggle over the company’s board of directors. During its shareholder’s annual meeting on June 10, 2013, the shareholders will be asked to re-elect the chairman Eli Ayalon (tenure 17 years).

But the outcome is not clear: The company’s biggest shareholder, Starboard Value LP that owns approximately 10.1% of its outstanding common stock, wants to remove Ayalon from his position. This week Starboard has sent a letter to the shareholders of DSP, urging them to elect its nominees, Michael Bornak, Norman J. Rice, III, and Norman P. Taffe.

In a letter to the shareholders  dated 24 May, Starboard wrote: “This election presents DSP’s shareholders with a choice of two starkly different paths: either support DSP’s director nominees, including Chairman Ayalon and Mr. Limon (tenure 14 years), who have overseen a massive destruction of shareholder value and have continued to pursue failed business strategies; or give DSP new directors who are willing and able to examine the Company’s failures and who have a strong track record of turning around underperforming companies like DSP.”

“From 2007 to 2012, DSP spent $557 million, or $26.65 per share, in R&D and acquisitions, yet over the same time period, revenue has declined by 35% and enterprise value has declined by 77%.  We believe that this shocking lack of any measurable return for investors, despite the significant investment of time and resources, is a result of the Board’s failure to implement clear milestones for R&D projects and failure to focus on projects that will result in a positive return on invested capital.”

DSPG Operating Expenditures by Quarter (USD Millions)
DSPG Operating Expenditures by Quarter (USD Millions)

This is a new phase of an old struggle: during the first half of 2012 Starboard quietly collected common stocks of DSPG and when it had fetched approximately 9% of the stocks, it demanded control over the board in order to redirect the company to new policy: stopping R&D investments in new products, cutting engineering overhead and focus on sales of current products. This is the same strategy Starboard implemented when it took over MIPS (that was sold to Imagination), Zoran (that was sold to CSR), and these days it tries to replace the CEO of Tessera Technologies.

Poison Pill

Techtime has learned that following the information reached DSPG management that Starboard collects its shares in 2012, the company have adopted Poison Pill plan to protect itself against possible hostile takeover. Today the board is fighting over the shareholders votes and is trying to convince them that Starboard wants to liquidate the company and cash its assets.

HDClear chip: DSPG audio/voice processor to reduce background noise and deliver consistent voice clarity during mobile conversations
HDClear chip: DSPG audio/voice processor to reduce background noise and to deliver consistent voice clarity during mobile conversations

DSPG replied that “Starboard’s presentation is a clever  combination of distortions and deceptions that misrepresents the activist hedge fund’s true intentions but reviles that Starboard does not have any real business plans for the Company. Starboard’s presentation also ignores the Company’s successful operational turnaround and fails to acknowledge the benefits of the Company’s research and development investments and the resulting potential for long-term stockholder value.”

The chairman wrote to the investors: “An analysis of 2012 R&D spending as a percentage of sales shows that our peer group has R&D spend approaching 38% of sales versus 26% for the Company. Additionally, over the past 5 years, DSP Group has generated $1.1 billion in revenues, 25.5% of which was spent on R&D.

This ratio is well below our peer group. Our R&D spending is efficient: the new chipsets resulting from the Company’s prudent R&D efforts are all cutting-edge and generating warranted attention among significant players in our markets. It also should be noted the R&D spend directed towards defending and growing DSP Group’s position as the global leader in DECT has been successful.”




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