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PortalPlayer Sells Out Cheap

By Dan Bloom – Updated Nov 15, 2016 at 5:22PM

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Why the deal with NVIDIA leaves me disappointed.

Sigh ...

That was my reaction to the news that NVIDIA (NASDAQ:NVDA) is buying PortalPlayer (NASDAQ:PLAY) for $13.50 per share in cash -- essentially no premium to Friday's closing price of $13.35, although, to be fair, PortalPlayer shares did really well last week, rising about 20%. Anyone think news of this deal leaked early?

PortalPlayer was hurt by Apple's (NASDAQ:AAPL) decision to forgo the PortalPlayer chip in the iPod nano, so this 20% gain was nice. Even so, I've been excited about the company's prospects since last summer, and this seems like a bum deal to me. The company's chip is still used in the current video iPod, and it has a great balance sheet plus new stuff in the pipeline. The most notable new product is a technology called Preface, which will serve as the brain for small secondary displays in the cover of laptop computers that run Microsoft's (NASDAQ:MSFT) next operating system, Vista. This feature, called Sideshow, has the potential to be a big hit.

So, besides Preface, what else is NVIDIA receiving for its $13.50-per-share offer?

Well, $7.68 per share -- more than half the purchase price -- is sitting on the balance sheet in cash and short-term investments. If you subtract the cash from the offer price you find that NVIDIA is buying PortalPlayer's technology and business for just $5.82 per share ($148 million total). Analysts are guessing that PortalPlayer will generate revenues of $130 million during fiscal 2007 -- so NVIDIA has purchased PortalPlayer for about 1.1 times 2007 sales. Not exactly a steep price, in my opinion.

For that low price, NVIDIA is getting not only the potential of Preface, but a deeper relationship with the most innovative company involved in producing mobile devices, Apple. As I wrote earlier, there is stiff competition among chip makers to win spots in Apple's iPods, and there has been a report that NVIDIA was chosen to provide chips for the next version of the video iPod. Nevertheless, PortalPlayer has worked with Apple for a long time and, as I mentioned above, its chip is used in the current video iPod. This relationship has to be worth something.

So why the low price? Perhaps there's a problem with PortalPlayer's technology, or perhaps Sideshow won't be the hit I expect it to be. If either is true, of course, then PortalPlayer likely made the right decision by selling itself. Until I know that for sure, I reserve the right to remain disappointed.

For related reading:

NVIDIA is a Stock Advisor selection. Microsoft is an Inside Value pick. Take any of our newsletters for a free, 30-day trial.

Fool contributor Dan Bloom owns shares of PortalPlayer. He's also the owner of one PortalPlayer chip, which he keeps inside his video iPod. He invites your comments. The Fool has a disclosure policy.

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