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Cypress Semi Ditches Its Solar Power Ambitions

By Anders Bylund | More Articles
September 10, 2008 | Comments (1)

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Cypress Semiconductor (NYSE: CY ) has decided to become a chip-design business. Shock! Horror!

OK, if that didn't sound like a drastic move, you should know that a good deal of the company's $1.9 billion trailing revenue came from its 49% ownership of solar power specialist SunPower (Nasdaq: SPWR ) . Cypress will lose out on its share of SunPower's $1.1 billion trailing revenues. Maybe now the magnitude of this change is sinking in.

Cypress shareholders of record at the close of trading Sept. 17 will be entitled to 42 million Class B shares in SunPower, and the actual distribution of shares will be made after Sept. 29. Cypress will liquidate its entire stake in the solar power outfit.

This spin-out basically forces Cypress to focus on its core semiconductor chip business, so it'll be easier to evaluate that company on its own merits now. I'm surprised to see the shares becoming sort of a fat dividend rather than being sold off to another corporation or on the open market, returning a big stack of cash to Cypress itself. But maybe the two companies' biggest institutional owners had a say in the matter.

Most of these vote-laden shares will go to institutional investors, as 93% of all Cypress stock belongs to various financial institutions. Janus Capital Group (NYSE: JNS ) and Fidelity combine for an approximately 29% share of Cypress Semi -- and around 8.4% of SunPower's share count. They're the two largest shareholders in both SunPower and Cypress. That dynamic duo will essentially run the show at SunPower now.

The eight-votes-per-share B stock is getting a separate Nasdaq listing, and in the future you need to decide between buying SPWRA Class A shares or the fresh SPWRB cache. You've seen this before in companies like Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) or Viacom (NYSE: VIA ) (NYSE: VIA-B ) , for example. It's a somewhat cumbersome concept for us individual investors, but it gives the big-money boys more flexibility in their buying decisions.

Management estimates that its shareholders are getting about $3.6 billion of value handed down to them, putting the expected Class B share price at $86 or so. That puts a price premium on those extra votes. Mr. Market will undoubtedly adjust that ratio to his liking in due time.

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Berkshire Hathaway is a Motley Fool Inside Value selection and a Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure prefers the simplicity of single-class shares, thank you very much.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Report this Comment On September 10, 2008, at 1:38 PM, bobk1106 wrote:

OK, so companies almost always try to spin-off their subs as stock dividends to shareholders. Why? Because it is tax free to the company and the shareholders. I'm surprised a financial writer at MF wouldn't know that if a company sold this type of asset for cash it would destroy a lot of the value as tax payments to the feds and state! What happens then? Cypress' cash goes up but the value of the stock (Cypress and the spun-off SPWR received) goes down by a massive amount like potentially 30-50+% plus from the taxes paid on the difference between their tax basis in SPWR (probably very low) and the current high price.
Even if they raised a bunch of cash by selling the asset what would they do with it? Invest it in more semiconductor assets? Investors would love that with the high growth and returns in that sector wouldn't they? No, they would dividend the cash to investors and oops, that is taxable too! Double taxation is even more inefficient.
Please, they are doing the smart thing by letting each company focus on what they do best which should unlock value over the long-run or at least let shareholders stuck with a low growth semiconductor stock and a high growth solar asset hold or trade them as they see fit instead of being locked into this unnatural hybrid. And they are getting the assets to the shareholders without destroying a bunch of value through tax payments. They should have done this a lot sooner and shame on this writer for making such a lame comment.

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