Yet Another Value Podcast - Focus Capital's Mordechai Yavneh returns to explain how $SIMO / $MXL deal fell apart

Episode Date: August 14, 2023

Mordechai Yavneh, Founder and Portfolio Manager at Focus Capital, returns to the podcast to discuss how the Silicon Motion Technology Corporation (NASDAQ: SIMO) / MaxLinear (NASDAQ: MXL) deal fell apart. Focus Capital's research site (with SIMO deck): https://focuscapitaladvisers.com/research Mordechai's December 2022 $SIMO pitch on YAVP: https://youtu.be/f--RrIG1fAQ Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:46] Update since Mordechai's $SIMO pitch with Andrew in December 2022; how $SIMO / $MXL fell apart [6:49] The four reasons $MXL said they were able to back out of the deal [13:53] Why $MXL does not really have the right to terminate the deal [22:37] Back and forth on the necessity for $MXL having to close the deal; how the $MXL / $SIMO situation compares to Twitter case [31:14] Likely outcome for $SIMO if they pursue arbitration; potential outcomes for $MXL [35:33] Understanding the difference between "Specific Performance" vs "Expectation Damages" and does breaking these deals set certain precedents? [40:03] What is the material adverse event $MXL is referring that $SIMO experienced [45:55] $SIMO fundamentals [53:04] What $SIMO is seeing in the 2nd half and how their business may perform going forward; Mordechai's 3 year outlook [1:00:23] What Mordechai thinks earnings for $SIMO looks like in a mid-cycle, normalized environment [1:07:42] Is $SIMO a seller again or $MXL offer such a big premium, that $SIMO has to take it? Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you.

But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you.

Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, I mean a lot, if you could rate, subscribe, review, wherever you're watching or listening to it. With me today, I'm happy to have Vaughan for the second time. My friend, Mordecai Yavne, Mordecai, how's it going?

Good, thank God. Good to be here. It's great to have you back on. I'm really excited for today's podcast. Before I get to it, let me just start with the disclaimer. Nothing we talk about on this podcast is investing advice. Everyone should insults a financial advisor. Always true.

The stock we're going to be talking about today is a, it's domestic listed, but it's foreign exchange. And as we're going to talk about, it has one of the wildest legal situation. I've ever seen. So everybody should keep in mind that comes with a little bit of extra risk. That disclaim about the way. Say again. Not legal advice also. Not legal advice. You're not a lawyer, are you? I don't know. No. I don't know. But down out the way, the stock we want to talk about is Silicon Motion. The ticker is SIMO. Longtime listeners of the podcast might say, hey, Mordecai is all I'm talking about SMA. IMO. Am I having deja vu? And the answer is yes.

Mordecai came on in December and did a great pitch for Simo. The pitch I was really, reading the transcript and re-listening to it. It actually holds out, especially the fundamental side, holds up pretty well today. So I'll include a link to that in the show notes. People should go maybe listen to that for some background. But Mordecai, the reason we're having you back on is because Simo, when we were talking about it, they were in a deal to get bought out by Max Lanier. Over the past month, the deal with Max Lanier has kind of fallen apart in epic, very bitter fashion. And I think there are two things we can talk about. We can talk about fundamentals, do an update on fundamentals. But what we really want to talk about is start by talking about the legal case and

this evolving really unique legal case. So I've rambled a lot. I'll turn it all over to you. Why don't you give a little background on what's happened since the December podcast we did? Okay. So let's just give the background for the legal case for those, those who aren't necessarily familiar with Silicon Motion back in May of last year, May of 22. Max Linear agreed to buy Silicon Motion. Most of it was cash. $93.54 a share in cash and a little bit of max linear shares, 0.388 shares come out to depending on exactly where max linear is holding it day by day, about $102, $105 a share or whatever. So the big holding, you know, the big thing that was holding up the deal from being concluded was Chinese government had to approve it from an antitrust perspective. There wasn't really any true antitrust issue.

The Maxilinear and Silicon Motion didn't really have any crossover in their markets, despite the talk of synergies, as you have to talk about in every merger. They really, Silicon Motion does nans flash controllers. MaxLineer does zero nan flash controllers, two totally separate markets. Wasn't really much of an antitrust issue, but tensions between the U.S., Taiwan, and China. Silicon is a Taiwanese company, trading, and MaxLinear is a American company, buying a Taiwanese company in the semiconductor industry when tensions between China, Taiwan, and the U.S., about semiconductors specifically are at all-time highs.

So there was a concern that the Chinese antitrust regulators would not approve the deal. And it dragged on for a while. They had to be filed. A little clock must have, started over again. And then out of the bloom on July 26, about two weeks ago, we got the news. The Chinese government is willing to prove it with the customary condition. of continuing to serve the Chinese market, fear reasonable and non-discriminatory manner,

not including any malicious software in chips being sold to China, keeping your present Chinese employees in China, keeping your Taiwanese research and develop in Taiwan, or regular and normal conditions that are expected in such a deal, nothing, no deal breaker of any sort. Stock zoomed from where it was holding, there was a huge gap between the stock price of about 50 and where the merger terms were of 105, mostly because the market did not expect China to be approving.

Then they approved. It zoomed up 75% to one day to about $903 a share. Then a few hours later, linear announces, oh, we're terminating the deal. We're terminating the deal. Stock plunges back down. Actually doesn't plunge it back down as far as it started. It was up for the day. I guess the market felt that the Chinese regulators giving approval was less likely

than Silicon Motion winning a lawsuit with Max Linear. Or maybe, I don't know what the market thinks is hard to know. We can talk about that. But I do just want to jump in. It was one and I was on my, I was on a baby moon in Europe with my wife. And it was one of the craziest trading days because, you know, we're over there and we're like doing dinner or something. I'm like, oh my God.

Like I can't believe Simon Max Lanier is actually getting improved. the stock's up 80% the spread is collapsed you know I'm having people telling me this is the best spread I've ever seen like all the conditions are cleared this is going to close next week and then out of nowhere the deal breaks so it goes from up 80 and all of a sudden it's down like 40 it's up 20 on the day it was just it was absolutely wild it's one of the wildest things we've ever seen absolutely absolutely I feel bad for any who came in at 93 I uh I know one person who's going to be listening to this podcast who did and he'll probably know I'm thinking of him when I say that.

Yeah, and then there are a bunch of people who sold at 93, which probably made sense in terms of the, you got most of your premium that we're looking for. It didn't really necessarily make sense to stick around for the last few dollars. I, unfortunately, was not one of them. I wasn't working that day. So I missed it. So, anyway, let's, let me get us back on track because we're reminiscing about wild days. So at the end of that day, China, Samir has cleared this.

This is ready to be done if Max Linear is willing to say. And Max Lanier at like 3.30, they come out with the press release. They come out with earnings. They say, we are not closing this. We think, and they throw the book at Simo. But basically they say, we think Simo has suffered a material adverse event. People who remember the Twitter deal will be very familiar with material adverse event. They think Simo has suffered a material adverse event.

They have breached some of the closing conditions. And because of that, not only are we not closing, but we don't even have to pay them the break fee that we would have owed them if the deal had been blocked by the China regulators or couldn't close for some reason. So we are walking away scot-free and they have their earnings call and they say, a person even asked them, hey, what are you going to do with the break fee? And they say, well, you know, it's probably going to be a legal situation, but we think they suffered a material adverse event. We're walking away scot-free. So that's Max Lanier's standpoint. Maybe we can talk about what Simo comes out with. right so basically they said that they had four reasons why they were able to back out of the deal they said one certain conditions of closing were not satisfied not capable of being satisfied to material adverse event like you said three that sign was a material breach of representations warranties commonence etc and that the date the original date for closing the merger was supposed to be extended two times but the after the

first extension on May 5th, they said that it did not automatically get extended because conditions for closing weren't capable of being closed. It was outside the last date for the outside date for closing anyways. The second outside date, which was the final outside date, it was August 7th. So they terminated a deal about two weeks before that was close to close. So Silicon Motion came back and said that this is all nonsense. They actually wrote a very strong letter yesterday, which I have it right here, actually. It's written a very, very down-to-earth method. Max Linear's supposed grounds for terminating the agreement are baseless and share fiction. It is obvious as manufactured excuses to try to get out of its binding agreement.

Max Linear's wrongful termination is a willful and material breach. And we will vigorously pursue or remedies, including but not limited to the right to hold max linear liable to substantial damages. You know, and I think one thing, I can't remember if they allude to it in the letter or not, but one thing they say is like, look, hey, if we have suffered, and material either change not so much, but if we've breached the merger, we have 30 days, you have to alert us, right? People who are, again, if you remember the Twitter deal, Elon alerts them,

files an 8K or files of an attachment to his 13D in early June that says, hey, you are in breach of the merger. You have 30 days to cure this breach. If you don't, then I can break the merger. But if you do, then the merger is kind of back on. Right. And one of the things I think Simon says is, hey, Max Lanier, you could have filed that we were in breach of the merger a month ago, two weeks ago, whenever. And then we would have had 30 days secured and then you could break it. You didn't file it. Like, it's clear that you guys kind of were thinking, oh, I hope China doesn't approve this. And then we can break the merger. But you never filed that we were in breach. So you didn't give us a chance to cure. Sorry, go ahead. I was rambling.

It's more than just, you know, even when you file that you're in breach, you can't just send a letter like what Max Linger did, you're in breach. You've got to say what is the breach. It's even spelled down the agreement. You have to send a letter that explains the basis for why you say there's a breach. I mean, whatever you think about Twitter's invented, Elon must inventive reasons not to have to buy Twitter. But he invented the reasons and he spelled them out. They're mostly nonsensical, but there was. There was too many bats.

There was foreign intelligence agencies that have infiltrated Twitter. Whatever the reasons were, he felled them out. And these were the reasons why he felt he could back out. Here, they're basically just cut and pasting all reasons given in the merger agreement that allow Max Linear to back out. They're cut and pasting that terminology without giving any reason for it. You can see that even when they say that Silicon Motion reached representation. representations, warranties, covenants, and agreements.

Well, which one? Did they breach a covenant? Did they breach representation? That's not the same thing at all. It sounds like you just cut and paste it. Any of these things would be sufficient, so they beach those. And there's material adverse event. And we're outside the date.

And these conditions weren't satisfied. Those are the four reasons, given why we're allowed to back out. All four. What are you talking about? Don't know. They don't know either. They just cut and pasted the language. It's unquestionable that it is share fiction and baseless.

I don't have any private information about what's been going on, but it's almost very little Silicon Motion could have done to breach, to breach the deal, the breach agreement. They basically have to be working towards the closing. They're clearly, we're working towards the closing. They got to governmental approval. They wouldn't have been working for governmental approval. That would be breaching the agreement.

But they worked to it and were successful at it. They got all the deals needed. It was nothing left to do. They didn't go out and buy another company. They didn't sell a part of the company. There's clearly nothing. obvious to say that they'd reach any in a material fashion. They weren't counting all of their bots as users. I don't know. Like at this point,

let's just throw that one in for all the time. They didn't actually claim fraud. You know, that's one thing. They didn't actually say, oh, all your revenues fraud. You know, they didn't throw that one in. That would also get them out of agreement. They didn't claim that. And just like, well, no one thinks everyone, every third party observer on the here understands that it's basically barries or mores. Barriers or more because max lineers, because Silicon Ocean stock has come down a lot and, you know, the whole industry, suffering through a downturn. And borrowers and more is probably more importantly, who caused max linear suffering. The same way the rest of the semiconductor industry is

suffering, their suffering, their last quarter to push them into a loss and then operating will still come motion, still profitable. Maxilinear is the one that this downturn has puts into a loss. And that combined with a huge rise of interest rates, they were going to borrow $3 billion from Wells Fargo, et al, other banks, to close this deal. they're paying SOFER plus 3%. So originally maybe that would be, let's say, $110 million a year. And now we're talking about paying $250 million a year of interest. I think that's probably the most important reason why they're looking at this $250 million a year for during a downturn.

Can we even afford it? It's not just that like if you go, when they announced this deal, if I remember correctly, deal is announced late 2021, early 2022. Max Linears enterprise value is about $6 billion, right? So this is a levered buyout. They're paying $3 billion plus a little bit of shares to go buy Silicon Motion, but you know, there's six billion, obviously Silicon Motion has value, but it's a leverage, it's a leverage play. Today, as you and I are talking, Max Linear's enterprise value is under $1.8 billion, right? So it's not just that, I mean, I agree with you. They're forecasted, and again, they'd have Silicon Motion in there, but they're forecasted

do 160 million of EBITDA this year. If you think about throwing 250 million of interest expense and they're like, that's terrible. But it's also, hey, they were going to go borrow more than their enterprise value to buy Silicon Motion at this point. Like the mass really changed. I heard Wells Fargo was probably looking at a billion dollar loss on the loan that they were going to do to Max Lanier. So I think Max Lanier, they were really praying. If China blocks this, we can pay the break fee and walk away. But when China approved it, you know, it's the worst day they've ever had in to say, oh, oh, crap, like, we're going to have to leverage the whole company to buy Simo, like, at the absolute downturn. This is going to be awful for us. Let's just take

a Hail Mary and try and get out of this thing. Very, you know, again, very similar to Elon signing at 54 and the whole tech industry meant to be down in him saying, oh, my God, Twitter might not be worth 20 as a standalone. Right. So, go ahead, go ahead. It seems obvious that push comes to shove, max linear does not really have the right to turn. So that might make you feel a little good and moral and the high ground as a Silicon motion shareholder, but I regret to tell you that I don't think that will get you all that much. So where is it going? So people are comparing this to the Twitter saga with Elon Musk and there's a few major, major differences. The biggest difference here is that Elon Musk and

Twitter went to Delaware courts. Delaware courts are famous or infamous, depending on how you look at it, for their super speed. It was everyone who was familiar with the topic understood that this was going to take place six months at the outside. The whole Twitter saga would be over one way or the other. Even with appeals, et cetera, in the end, it took, what, three months maybe, a little less thing, and it was done. This is not going to Delaware courts. This is going to Singapore arbitration under the SIAC, using Cayman Island laws, and using Delaware law to define what a material adverse event is. So that just sounds like some amalgamation of everything there, but the basic point is it's going to Singapore arbitration. That's not happening

in three months. It's not happening in six months. If you look on, you know, the look up Singapore's stats, they'll tell you that they finish arbitration within about 15 months from when arbitration is flawed. I'm here to tell you that that number is also underselling it. 15 months from when arbitration is spoiled, that's their average. Most of the cases are seeing are $15 million cases,

$20 million cases, $50 million cases. The biggest case they took in 2002 was a $600 million case. This is a multibillion dollar case. It's definitely going to be on the higher end of how long things think. We're probably talking a minimum of two years. At that point, are we sued

for specific performance? the world will look different in two years. I don't know if Maxinna will be capable of buying them for 102. I don't know if the shareholders, I would be very disappointed if in two years, the shareholders will be looking for Max Linear to be buying them for 102. I hope that Silicon Motion would be significantly higher by them.

So I don't think we're actually looking to sue Max Lanier to actually close. I think that's not really in the cards. So what are you talking about? So the termination fee, $160 million, that they should be able to sue for. Two, three, whatever it is years down the road, they very likely will be able to get a judgment for at least of $160 million. What's $160 million?

It's $5 a share. Yeah. So it was supposed to go over $102. Now it's trading for a little bit under $60. You get $5. Not nothing. I'll take $5, but that's just not really competition. So I see, you know, watching people online and the different people who,

texted and emailed me and whatever. Look, I feel like you're calling me out because the moment the deal broke, I sent you a message that said, we've got another MAE, let's go. It's Twitter all over again. I know you're calling me out, but that's okay. I appreciate you not doing directly. I do talk to other people also. Anyways, so the merger agreement does state that in cases of a willful and material breach,

damages are not capped at termination. In all cases, damages are kept that termination be, except in situations of a willful material breach, which is specifically, if you're paying attention, Silicon Motion has been underlying that this is a willful of material breach. And again, I think it's clear that in basically any arbitration, court of law, that's what they're going to decide that this is a willful of material breach. But that doesn't get them as much as you think it will. People are probably expecting to say, listen, August 7 is when they were supposed to close.

At that point, if they would have closed, shareholders would have gotten $102.45 a share about. Instead, the shares on always 7th closed at about $61, $50 or something. So the differential is about $41 times $33 million, shares outstanding, $1.4 billion of damage, uncapped. And that sounds like the best of both world. We'll get the $1.4 billion cash, keep the company. I mean, they can't actually get $1.4 million of cash simply because, Max linear doesn't have that money. So let's say that max linear, yeah, yeah.

Much of damages would push Max Linear probably into bankruptcy. If they have $400 million of debt plus $1.4 billion a legal word against them, they probably go into bankruptcy, get something out of it, share with other creditors or whatever it is, unless there was some massive upturn in some conduct industry, like really massive because Max Linear is probably over levered for the size of the company. I don't think you'd actually see $1.4 billion. Let's say we'd walk away in the end with $500 million worth of cash or shares or something from X linear.

Sounds like a nice outcome and you keep your Silicon Ocean. Best of both worlds. Unfortunately, it is not so likely that that will happen. And the reason is because we have to keep in our head the difference between company and the company shareholders. The shareholders suffered $1.4 billion of damages. The shareholders are not parties to the merger agreement. The merger agreement is between Silicon Motion and MaxLinear. Silicon Motion didn't lose $1.4 billion because they weren't going to get $1.4 billion.

In the merger agreement, clause 8.8 says that there are no third-party beneficiaries created by anything in this agreement, except for the banks for certain clauses. But otherwise, no third-party beneficiaries. This has been litigated, not so many times. It's been litigated in New York. In 2005, the famous consolidated Edison case was supposed to, Connet was supposed to buy Northwest utilities. They backed out from the merger. Northwest utilities sued them for the difference in what they were supposed to get and their trading price. Northwest utility shareholders sued Connett, two different suits, went through court.

It went to Second Circuit. the Second Circuit ended up ruling no third-party beneficiaries. So in the merger agreement, you have no rights for damages for the difference in price. The damages you can get are the amount of money you spent on trying to get the merger closed, your legal fees, that type of stuff that you spent in working towards a merger and they backed out of you. That's your damages, $25 million. Here. And now, a quick word from our sponsor.

Our traditional expert calls in the investment world becoming obsolete, According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls

and a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. Let me, can I just push back there? So I completely, it is unquestionable. You and I, as I, Osimo, shareholders cannot sue Max and say, hey, we would have got an

100 or stocks worth 50. Give us 50. Unquestionable. If I can just put back there, so I hear you, like, in this case, specific performance, which would be the deal, close the deal is not available to us. I know there's a merger cath, as you said, except for willful breach, which I think this willful breach. It's not available to us. You could go for specific performance. And if two years down the road, Silicon motion is trading a 10, they can still be sued for specific performance. And if Max Linear financing is not a condition to the agreement, but Maxlini has to act. actually be able to get the financing. If two years down the road, Max Linger is doing well and Silicon Motion is doing poorly, you couldn't still be suing for specific performance, and you could probably get it. I just don't know how likely that's maybe an option in the background. I don't know how likely it is that practically specific performance is what we'll still be asking for in two years and that Max Lini will actually be able to do it. I mean, one thing, and we'll talk about this in second, is there are branches of this

where Silicon Motion sues Max Lanier wins a specific performance or $2 billion or whatever you want to call whatever comes out. And Max Lanier has to file and Silicon Motion has to take them out of bankruptcy as their largest sunscreen. Not a specific performance. Specific performance can't get them to bankruptcy.

If you're suing with a specific performance then they can't do it so they can't do it. Then you can sue for damages. How much damages do you get? Well, you would get the specific Yeah, I do hear. No, no, no, no, no. You do not get the difference in price.

That's not what specific performance. You can sue that they should do what they said they would do, and you could win that lawsuit. If they can't do it, then they can't do it. Now you can sue for damages. Yes. And the damages is what we're talking about. And this is called cheerholder expectation damages. And the Second Circuit of the United States has ruled that cheerholder expectation damages are not valid in a merger agreement where it says no third party beneficiaries. Now, is that absolutely clear? It's not absolutely clear. That's the Second Circuit of the U.S. A similar court in Ontario, this was in 2005, was the Second Circuit.

In 2021, in Canada, Sign World was supposed to be buying Signplex, and they backed out because of COVID, which was not a valid reason to backing out. Actually, pandemics were specifically carved out as a reason in the merger agreement, even though it was signed in 2019. They luckily carved that out. Sineplex through Sarmorold, they came to court in Ontario. The court ruled that they do not get damages for the premium loss, because that is not a damage of the company. They do get damages for lost synergies, which they awarded Sarnplex $1 billion for it.

Star Wars now in bankruptcy, that's being appealed. But they got money for loss synergies. Not for the premium. They specifically ruled that they cannot get the premium. cause no third party beneficiaries. Now, they could be going for law synergies, but the law synergies here is not going to be $1 billion. But the law synergies in the prospectus,

they predicted synergies of $100 million. And part of that probably accrues to Simon, part of it probably proves to Max Linear. And between you and the landposts are probably all fake. I don't think there's any synergies really, you know, you can get synergies maybe in your county department. I don't think there are $100 million of synergies. Certainly not more than that.

And it's the type of thing that's very hard to prove a high number for loss of injuries. Let me just back up. So in your scenario, if we go two years down the road and rule specific performance, Max Lanier says we can't close specific performance because we can't raise the financing, right? You're telling me that Simon would just have to walk basically because Max Lanier can't close anymore. Would they be able to do the damages? But the damages would be you have to close this. Right?

That's two different things. Specific performance is to do what you said. You do damages is monetary compensation for the fact that you've reached agreement. Specific performance. Specific performance is not damages. Specific performance is not damages. Because to me, so specific performance you have to close. So Max Linear would have to say, we can't close.

And then they would have to file, right? Wouldn't they have to file? File for what? File for bankruptcy. They don't know any money. They owe the ability to close. What do you want me to do? They owe $92 per share.

No, they don't. That's not what that's a specific performance does I have to close. I cannot close. So I'm not closing because I cannot. But I don't owe you $92 share. I owe you that you have the right to force me to buy you. I can try to force me to buy you. I cannot do it.

But that's why I think they would have to. I don't owe you money. I do not owe you money. I owe you to buy you. Buy you means give you money and get cheered. I cannot give you money and give cheers to I don't have the money. Therefore, I am not doing what the court ordered me to do because I am forced major, not able to do it.

Maybe my fault, but I cannot do it. So I'm not in contempt. the court or anything, I cannot do what the court told me to do with the arbitration tribunal in the situation. At that point, you could sue me for damages. Give me money in place of the fact that you did not do what you agreed you do. That's monetary damages. And the monetary damage would not be one point, would be unlikely to be $1.4 billion. And the second circuit would not give damages for that. And the Canadian court wouldn't. Delaware courts, interestingly enough, might. It's very much up for grabs. I don't know how

close to you, but in the middle of the Twitter saga, is my video, do you see my video? Your video win a little strange, but I can still hear the audio just fine. One second, let me see if stopping the video and restarting it, solves that problem. There we go, yeah, perfect. How's that problem, right? Turn on the computer, turn on the computer. Sounds every tech problem. So in Delaware, during the, Chancellor McCormick, actually, there was a side case.

I don't know how close you will follow in Twitter, the Twitter lawsuits. Oh, I was reading everything with the Twitter lawsuits. Good. Luigi CRISPO, I believe, was an individual shareholder of Twitter that also sued Elon Musk. And there was a question why they had standing to because he was a third party beneficiary. And the agreement said no third party beneficiaries. And Chancellor McCormick wrote an opinion on this topic where she somewhat danced around. And she talked about the Second Circuit decision.

She talked about other decisions in Delaware that seemed to say that, no third part of beneficiaries does not include the shareholders. Because shareholders are obviously yes beneficiaries of the agreement because they're the ones getting paid. So no third part of beneficiaries means anybody else except shareholders, but shareholders are included. There were three different cases that she discussed. None of them were actually about getting damages for the premium loss. And the cases were not necessarily so precisely.

it didn't follow from the cases that you would get the damages lost. They were more like there were post-closing conditions that somebody agreed to buy another company and then agreed after buying not to change of prices or not to do this or not to that and shareholders or a suit over that, former shareholders. It was like a family-owned business that wanted certain things to continue. And the question was whether they had standing. And the answer was yes, but who was that? written for. But that doesn't necessarily translate. She speaks this out, Chancellor McCormick,

that it's not so clear whether the Delaware precedent would allow for damages for the premium gap or not. That needs further briefing, needs further discussion. It's a question in the air in Delaware. Second Circuit wouldn't give. Canada don't give. Delaware may be or may not be. This is really not so relevant because we really want to know what a Singapore arbitration tribunal will find under Cayman Islands law. Yep. And we don't have any precedent that I know about Cayman Island law or Singapore arbitration

tribunals on the topic. But to me, in the landpost, the weight of precedent of the Second Circuit and the Canada, which is directly on this, and Delaware, which is about other things and was hypothesizing what would be about this interesting question, I think it's more likely

the Singapore Arbitration Tribunal will say we're not awarding $1.4 billion. We'll award your damages. Your damages, definitely $160 million termination fee. The $30 million you spent on, you know, the lawyers and the people you pay to work through the regulation stuff, you know, maybe or maybe not cost of the arbitration itself. Yeah? So we get you to $200 million maybe.

That's not what everybody's looking for here. So in your mind, the most likely outcome if they pursue this arbitration is then is Simon winning and kind of taking in, as you said, call out $200 billion, which kind of kind of comes out to, if I remember the math of my head right, a little under $7 per share at the end of two years. You think that's the most likely outcome here? I think that's the most likely outcome with a parenthetical option that if things go terribly silicon motion and things go well for Max Sinear, they do have the option to force performance and it could very well be that Max Singer will be able to. It is unclear to me from reading through the financing

commitments from Wells Fargo, whether Wells Fargo's commitments will last through the two years of arbitration or not. There's no specific ending date in Wells Fargo commitment. The commitment is to finance whatever is in this agreement. If it's failed that the agreement never terminated is possible Wells Fargar commitment will still be there to lend the $3 billion. Or it might be another lawsuit on that topic. That's not really clear to me. What I don't know of a clear precedent. That's probably me not knowing more than that there isn't any. There probably is some precedent out there that's relevant. It could be that Max Linear will be able to close simply because they, well, Fargoer will still have to lend them the money.

So I don't know about that, but that's like kind of an option. And that's a valuable option. But personally, if in two years time, we still watch this performance, I didn't support you. Let me push back. So again, how I had been, and I have done work on this, but not as much as you, and I am certainly not a legal expert, but how I had been kind of shaping around to it was, you have the suit, and it's a two-year suit. And at the end of it, if Simo wins and gets specific performance, Max Lanier would either need to close or they'd need to file is how I had been looking at it.

And I understand what you're saying. That's just how I've been looking at kind of how what I had been thinking was so you've got that hammer at the end of it. And then where you kind of come out is you have a either a settlement between now and you have a settlement between now and you have a settlement between now and. and then where the deal gets recut and basically, and this assumes a positive thing, but basically Max Lanier is breaking this was a way to force a huge recut of the deal, right? Where the original deal was something like $90 per share cash and like $18 per share in equity, you're basically coming back and saying, all right, we're going to change this deal to be $10 per share cash and Simo shareholders get 50% of the combined company or something.

Definitely not happening. I'll tell you why. if they raise the stock portion of the deal, then max linear shareholders have to vote on it. Yep. Max linear shareholders are going to vote no. They don't want this deal. When the deal was announced, the stock tank, when the Chinese approval came in the stock tank,

because they don't want the deal to go through, I don't blame them. I hear you, but if they go to their shareholders and they say, look, we're going to lose an arbitration. And if we do that, we're going to have to pay $90 per share to sim. or file. Like that's probably not even true, as I said. Okay.

Okay. You might be right that they're looking to recut. I don't see a massive recut. I know of mostly shares is very difficult. And if they recut it to, let's say, just let's say recut it to the same amount of shares, but let's say instead of $92 cash, $80 cash. So instead of $10,4, we'll bring it down to $90 a share. Yeah, you need another vote from Simeo shareholders.

Don't know if that would or wouldn't go through. I voted notes of the first merger, so I don't know that anybody's listening to me. Now, if we can't, you know, confirm, confirmed $90 share, it could be people who vote yet. You know, I don't know. There would be a need to be another vote, et cetera, et cetera. It could be that's what MaxLineers game here is. They're just trying to recut. It's perfectly possible.

It's very hard to know what's going on inside the minds of the Max linear management. That could be what they're aiming for. a massive cut to $60 share I don't think Simon shareholders are interested in or $70 or $75 share I doubt to be interested in it and changing mostly to stock which is affordable

is just not happening because max linear shareholders are not going to prove it. Let me just back up real quick to and I don't want to harp too much on it but it's really it's really a different view than what I've had in your specific performance case

right let's drop Simon and Max linear Let's just go to a normal company, buying a normal company, right? I'm buying Mordecai, Inc. Market turns on me. I get really cold feet. I say, hey, Mordecai, I'm breaking the deal. And you say, what? I followed everything.

We've got a contract. You sued me for specific performance. You win. You say, great, I win. Pay me. And like to me, buy me. Buy me. You say, great, buy me.

To me, what you've created, if I don't have to, if Max Lanier could walk in this situation, if I do, what you've created, I could just say, Mordecai, I'm not buying you. And you say, okay, great, I'm suing you for expectation damages now, but because I was just buying it. I then go to court that you, they'll start putting you in contempt of court for not filing a court, a court order. Oh, here's an arbitration order.

You have to take the arbitration award for the specific performance. Take that to court. The court would mandate performance. And then, listen, Max Linger is not going to ignore a court mandated order. It's not happening. So just like you on, Any money to see a month wasn't going to ignore a court mandated order. Max Linear is not looking to be in contempt of court and ignore an order that they can't fulfill.

But so that's why I think they need to file for bankruptcy. That's why I think they would... That doesn't make you file a bankruptcy. If you can't do something, you can't do something. To file for bankruptcy, you have to have a monetary award. The civic performance is an award to do in action. It's not an award of money. Money is damages, and that's expectation damages.

But expectation damages are for the shareholders. is not for the company. And as I said, the Second Circuit, Canadian Circuit, and probably not for sure, very not for sure. The arbitration tribunal could go either way. But likely, it's definitely a strong likelihood that the arbitration tribunal would say, we're not going to award expectation damages for the shareholders that third party beneficiaries. I'm going to have to do more work on this. And I'll follow up with you offline. Our listeners can either hit one of us out there. I know there's very disappointing for all the Silicon on most of cheerholds out there, including myself.

But that's what I expect. I believe that most of the precedent going forward should be on either the possibility that there will be a recut and another shareholder vote. And then just we're talking like recutting from 105 to 90s and just, you know, negotiating employee or I think really focus on the fundamental case, which I think is very bullish. I just feel like in that that scenario has created a precedent where any company that cannot bought, that isn't a merger contract that they cannot fund kind of off their

balance sheet has a free out by breaking, getting sued for specific performance, and then saying, hey, sorry. Not true. In Delaware, you sue in Delaware. If you're sued in Delaware, so you talk about a three-month process at the end of which they already have the financing commitments and you close us because you have to. Okay. In this case, you're saying it's a two, three-year process at the point.

So yeah, maybe at the end you can get specific performance and maybe the financing commitment is still valid, which you might be. The question is in three years, do you still want the specific performance. If you do, then you get it. And that option is valuable. Again, that option is really valuable. You have the option. It's stupid, specific performance, and there's a strong likelihood that the Well Fargo

commitment will still be valid in two, three years from now. Because it's valid as long as the merger agreement is valid. And they might claim, well Fargo might start claiming that the termination was, it was terminated even though invalidly, so they don't have the commitment anymore. It's not really clear in the finance commitment. I read through it with a fine tooth comb. It still wasn't clear. I don't know enough about precedent on that.

It could be in three years, Wells Fargo, won't mind, you know, financing. It depends on what the financials then are like and what the interest rates then are like, and it could be they'll be okay with it. Very true. I mean, this is a very cyclical industry, you know, boom time generally follow bus times. We're in bus times right now. Maxineer had a $6 billion market cap two years ago. Like, it's very possible.

That option to assume that was in order for actually very valuable. Right now as the stock trading in 60, there's an option to assume for a specific going to $100 for it. That's really valuable. All right. personally believe by the time that option becomes in play, the stock will be passed on them for it. That's what I believe on the fundamental view. Let me just take out a moment. We didn't really discuss.

We discussed why, I mean, they didn't really give any explanation of what the breaches, supposed breaches of warranties. No, we'll transition us nicely to fundamentals because that's why I want to go down. Let's talk about the material versus event for just a moment because there it seems obvious that they're referring to is that So, Silicon Motion's business fell apart. You know, the first two quarters of this year, revenue's been down 40, 45%. Net income's been down 80%. Yeah, so there you go.

Here's our material adverse event. That seems to be what they're affirming. So I just want to speak out just for all our listeners that that's not going to fly. There's really no material adverse event here for two major reasons. First of all, again, the material adverse event here is on the Delaware War. Delaware Law is very clear, very specific. And Delaware, they used to say that Delaware has never found a material adverse events in history. A few years ago, they changed to a material that they've only once found material adverse events in history.

Basically, the law is like this. Delaware says to be a material adverse event, you have to have the business collapse on a permanent basis. So the one time they found a material adverse event was the company that was being bought had defrauded the FDA and made up all the clinical trials and their revenue disappeared and with no foreseeable reason to think that that would change. It was Acorn Fresnius. And if you remember, Acorn made sterile eyedrops

and they literally had, they, you know, Fresnius in their suit, it came out that acorn literally had cockroaches running around their sterile eyedrop facilities. And like cockroaches running around your serial, your serial facilities. It's not an merger contract, but I use it to say like how bad the business was

that they were buying. And I believe they actually made. up clinical trials in their in their made up data in the clinical trials that submitted to FDA it was a terrible situation the revenue fell off the cliff and it wasn't coming back that was a permanent M-80 what's not a permanent M-A example I forget the name but one of the private equity firms contracted the body cake business then came COVID take business wedding cake business I believe a Colbert K-pop yep yeah totally fell apart yeah and Deliver said that's not a

material adverse event yes COVID it's not going to last for forever, two or three years, over the end to wedding business will be back. No revenue for two years is not a material adverse event. So is that no way

for silicon motions clearly cyclical downturn to be a material adverse event? That's the reason number one. The second reason, just as important, is that these material adverse events clauses will have carve-outs. And the carve-outs generally do

and in this case do, exclude general economic conditions and let me quote, exact term they used, changes in general economic, business, labor, or regulatory conditions, changes in securities, credit, or other financial markets, interest rates or exchange rates, and changes generally affecting companies in the industry or industries in which a company or subsidiaries operate in Taiwan, the U.S. or globally. None of such changes will count as a material adverse event.

The only way stuff changes that affect the industry as a whole, hand-cancel material reverse event is if it affects silicon motion disproportionately more in a sense that makes it a material reverse event. But it's not. You look at Micron, Ska-Hine, Southwest and Digital Samsung, they're all suffering. Their revenues are down 50%, 60% their flash. Let's look at FISA controllers.

FISN is probably the closest comparison to Silicon Motion. business. They sell modules of combined flash and controls. They sell controllers. Their business, let's see, their business for the first quarter this year was down 41%. Second quarter was down 39%. And that's the business as a whole. The control business for itself was actually down 53%, which is more than Max Lillinger's business was down. I guess Silicon Motion business was down. So I guess the locomotion is actually gaining cheer in the downturn. So one is cyclical to its industry wide. It's temporary.

It's industry wide. There's no way anyone would consider this under Delaware law. There's no way in Delaware court would consider some material or event

but any sense of the imagination. And even though they're not going with Delaware court is going to Singapore arbitration under Delaware law,

I don't think there's anyone in the world that would see this as a material event based on the contract as written. My favorite tweet was somebody said,

hey, if you look at Max Lanier's results and Silicon Motion's result, Max Lanier's performing worse. So there's a chance that the M.A. happened. It was just on the max linear side.

Yeah, yeah, I think we've actually pretty well covered the legal case. Obviously, you and I, you've done more work, so I'll defer to you, but you and I have a slight difference of opinion on the outcomes of a specific performance potential, but I think we've pretty much covered it. Let's quickly talk about, and there is even, again, I'll defer to you, but even you're right, I'm

wrong, like there is definitely a lot of option value to be able to sue for specific performance. I love what you said. I'm cyclical, but business, Max Lanier could be worth $7 billion in two years. And you might have Wells Fargo saying, hey, we'd love to fund it. We'd love to fund this loan. This is the best loan we'll have a fund, right? So it's quite, it's quite possible that Wells Fargo will finance it if the arbitration rules they must. It's quite likely that Wells Fargo, definitely not out of the realm of possibility that Wells Fargo will, as you say, want to fund it. And even if they don't, it could be they'll

have to anyway. So it's definitely absolute value to that, that's important. Yes. And as you said, there also is, like, if the damages are, let's say an arbitration is going to roll 200 million, like there is also optionality to, hey, you know, six months from now, everybody might say, okay, let's, Max Lanier says, yes, we, we have some terrorist from the specific performance. So if on motion, we'll give you $300 million right now, walk away, you know, so there's, there's going to be some pot of gold at the end of the rainbow. It might not be the $100 per share. Let's quickly turn to the fundamentals.

And again, I'm going to refer people to the December podcast. We actually did quite a bit on the fundamentals and what makes Silicon. silicon motion so unique and why again cyclical business so we're in a bad cycle right now but why over time they should be a share taker why they should but i just want to quickly get your thoughts on how the business is performing and kind of how you see the cycle evolving right okay so um so anybody who's who's been paying attention so the memory the semiconductor industry is experiencing a downturn memory in particular is experiencing a massive downturn if you look at the flash uh flashmakers uh that's micron s k hynix um western did

digital, Samsung's memory division, Kokeshia, which should be Toshiba, and also YMTC, which is a Chinese flashmaker. You put them together, over the first half of this year, they must have lost $20, $25 billion plus just in the memory division. Huge amounts of money. What's the basic cause behind you? So let's start with taking a little bit of a far view back. What's the basic cut?

They're not pumping AI hard enough. They're not up with AI hard enough for a guy. That's the cause. Yes, a little bit. AI does use, an AI server uses probably three times amount of nan memory than a regular server does. So there's truth to that. But what happens like this? Everyone, if you go back two years, 2021, everyone was talking about the shift shortage.

It was a chip shortage. Autos weren't being made because they couldn't get chips, et cetera, et cetera. But because of that chip shortage, all of these customers were nervous about not getting allocations. Everybody doubled order, triple-goat. This happens all the time in the cyclical semiconductor industry, especially in memory industry. People are nervous, they order, double order, triple order, quadruple order, I don't know. Inventory starts building. 2022 inventory starts, continues to build.

And then the demand explosion of 2021 starts falling off. So the demand evaporates. We're now looking at 2020 had probably double digits down on the PC market. The smartphone market has been down. We're going to be down this year. The PC market, smart phone market, the server market,

all the end markets are all down year over year. They were thinking the good time and they were a chip shortage. So they double ordered the memory that needs. Now all the end users and the channel market have way more memory than you need it. So they said, okay, you know what? We don't need, let's hold off. None of this is on long-term contracts.

Everybody's ordering in the quarter for the quarter. None of Silicon Motion and all the flashmakers have very little visibility into that business. They're building out capacity because they're hoping and expecting for, you know, their memory to be needed more and more. But they don't actually have any long-term contracts for the memory and that very little visibility. Their customers can tell them, oh, we think we're going to need 20% more, 40% more this year. And then two months later and say, you know what, change our mind. We don't need anything. There's not, they, it's operated on a day-to-day basis.

They have no visibility. They're giving you, you know, their forecast for the year. They really have no clue. The forecasts are based. They know what they're planning to build capacity and what they're hoping the market will buy. But they don't really know what the market will buy any more than any other analysts who trying to predict what the PC market will look like in a year's time. Yeah. So they've been building out capacity for flashmakers. And then there was over-ordering, so there was too much inventory. And demand fell. Between that, you got this massive disconnect between the amount of supply that the flashmakers want to provide and the amount of demand that the customers and the middle market want to buy for the customers. And it's this massive disconnect. With that massive disconnect, what happens is that people

stop buying memory. Memory prices get cut massively and they start bleeding money in the flashmails. They're bleeding money. They're underutilized, underutilizing their fabs, which makes them take massive underutilization charges. So they're selling their less product, at a lower amount of money, and it's costing the money to leave part of the fabs, idle part of it. So how does it correct itself? So naturally, somewhat self-correct. They were going to increased capacity this year. Instead of increasing capacity, they're slowing the increases and eventually cutting production. It takes time. But all the flashmakers have announced cuts in the first quarter, more cuts in the second quarter. You know the land post? I'm probably going to

announce more cuts in the third quarter, but they're going to cut, cut, cut, cut until they're confident that inventory starts to bleed dry. Inventory by the flashmakers are still pretty elevated. For example, I'd say Micron said they need about $6 billion of inventory to match what would be a normal, you know, regression forward sales and they have $8 billion of inventory. So that's still pretty hot, yeah? You can see the inventory building the balance chain and it hasn't really come down yet. But the end customers themselves and the channel market, inventory is starting to dry up. There are some indications of that. It's really hard to know. Part of what's hard to know is, you know, we can still enter a recession. We haven't actually done that yet.

We enter a session, the end markets of PCs, smartphones, and servers, which right now are weak, can get weaker, yeah. There's nothing weak enough that it can't get weaker. It can totally get weaker. The man can continue to go down and they'll have to cut production more. This could end up with a flashmaker going or two home with the bankruptcy. Some like Samsung that has other divisions to cover the losses in the memory is going to be stronger. Some like Micron and, you know, S.K. Heinich's a situation. So maybe are, you know, more memory focused, I'm going to suffer more.

What I want to underline here in all this is Silicon Motion is suffering, you know, as a consequence of that, less memory being bought, both because demand is down to the end market and because people have to work through the inventory. So they're buying less fewer controllers. So their revenue trapped, dropped a lot. Drapped from the first two quarters, about 40, 45%. They're still profitable. This is one of the things I love about Philicomotion.

Throughout the cycle, they are profitable. They continue to add cash for the balance sheet, no debt. They're still taking money and less money. During the downturn, it's less money because they're selling less goods. Gross margins come down a little bit. The gross margins have been used to are about 52% because their operating expenses and their employee base is similar, but on less revenue. So their gross margin now is down.

The gross margins and the gross margins are down because they're, they're expenses are up, the CSFC's charges are up, and the assembly charges are up, the packaging charges are up, but they're, they're, they're, they're, they're amortizing that over less revenue. So the gross barge is about now 40, 42%. Now, can I just, can I jump in here real quick, Murdochai? So I think you've done a great job of explaining where the cycle is and kind of what's happened over the past six months. They, look, the cycle's gotten even worse. I just want to jump in, when I read the silicon motion, and part of, I think the recent Silicon Motion's stock hasn't gone.

back to where it was before samar came out and then all this part of it is the option but i think part of it is also people saw max lanier said hey m ae break we're leaving and then simo put out their earnings that night or the next morning i can't remember exactly and i'm just reading and here's some quotes uh first half was challenging we're optimistic the industry as well poise growth in the growth in the second half of the year we accept q3 sales will be up 15 to 20 percent quarter over a quarter So I want you to comment on that, but I will just say from a our perspective, from a trader perspective, from an investor's perspective, I think when Max Lanier files, hey, we're filing an MAE and Silicon Motion hasn't said anything because they're getting hit with it about the same time we are. Everybody says, oh my God, this business bus being on fire. Things are a disaster. And then they report Q2 results that as you said are profitable. And they say, hey, things are actually getting better in the back half of the year. So I just was hoping maybe we could transition to you commenting on, you know, where's what Silicon Motion seen in the second half and how their business will perform going forward. So I want to, you said from investors, people who will give you and from a trader's point of view.

And I'm going to split that to two because they're two separate things. The trader's point of view is probably very interested in what's going to be quarter three, what's going to be quarter four, you know, near term results. And the answer is I don't know. And I want to underline that Silicon motion will not really know. They predict 15 to 20 percent up. They predict the stronger second half the year. They don't really. It could get a lot worse.

So they report at the end of July. They do have what's, they're very near term. months worth of information where they say things are starting to firm up a little bit. But at the end of the day, it depends on the end markets. They have no real visibility to their customers, customers, by the way. The end markets are not their customers. It's mostly their customers' customers. Yeah, they don't have real visibility into that.

They don't know the second half would better. They hope and think they see beginning of shoots of some, you know, budding of some grass coming out of the ground that it's starting to come a little better. And that could not be true. I do not want to be in the position of telling you what the next six months will be, I don't know. Great point. Yep. I'm not a trader.

As an investor, I'm going to say, what's the next three years going to be? And the answer is, I don't know when the cycle end. So far, it looks like quarter one was the troughs of the cycle. And it's been getting better since. Quarter two is better than quarter one throughout the industry. And everybody's saying that they're seeing inventory levels coming down by the end market. If there's a recession, it could be another, you know, a double dip kind of in the end market demand. Who knows?

I don't know. But I know that in three years, we'll be out of the cycle. The cycle has always been a down. This is the worst downturn, like Micron says, it's the worst downturn we've seen in 13 years. Yep. 13 years, not such a long time. This happens every 10, 15 years. It does.

Yeah? And one of the nice things about it, last time we had a downturn, not really as bad, was I think, around 2018. Then Max Silicon Motion had to take some write-downs on their inventory. The main reason for that is a little bit of their business model had a little bit different. They have three divisions. They have their SSD divisions, about 50% of the company. They have their EMMC and UFS business embedded at like more than smartphones, tablets, and, you know, Internet of Things type of applications. That's about 40% of the business.

And then there's SSD solutions where they package flashed together with highly customized, very high-end controllers, and they sell it to hyperscalers like Facebook or Al-Babobo, Beidu, et cetera. That's about 10% for the business. So 50 is SSD, 40 to the embedded, and 10% for the SSD solutions. Back in 2018, when they had to take write-downs, their SSD solutions was they were boring memory. And they were stuck with... There goes the video again. There we go.

I'm back again. I'm not sure what's happening today. But what happened was that when Nan Flash started crashing in price, they were stuck with old inventory of Nan Flash that they couldn't sell at the old price anymore. So I think right now. Two things have changed instead. First of all, SSP solutions didn't live up to expectations. It's a much smaller part of their business than it was back then. Second of all, they changed their contracts where they no longer are buying Flash and selling it on.

They are basically just taking it on consignment for their end customers. The end customers are ordering the flash and they're doing the packaging. So they are on most of their customers, on the large majority of the SSD solution customers, they are no longer taking the flash memory risk. It's only, they only have to take it right down if their controller inventory goes down in value. And that is much more stable pricing, much more long-term usage. Yeah. So they so far have the cycle, now I have to take a write-down.

their inventory has been getting higher a little bit but it seems to be coming back down I was going to make that exact comment the peak of the inventory compared to their sales was in quarter one where they had like two and a half quarters worth of inventory which is far more than they want to have they want to have like one or a little less than one quarter of an inventory has historically been what they had

they raised the inventory levels a little bit last year when there was a chip shortage because they wanted to be able to provide so the hills raise inventory like everybody else yeah um but two and a quarter is way more than they need but start to come down uh right now they're about 1.8 quarters worth of of inventory and as if the next two quarters continue to uh raise their there where they're claiming 50 to 20 percent in sales and the inventory comes down they'll be back pretty soon by the end of the year to normalize inventory levels and and and we won't have to even be talking about the possibility right now which i don't think is in the cards uh the cycle

I was just going to, that was one of the things, again, when you get the merger break and Silicon Mission, their company that's been under contract for a year, right? They're not doing analyst calls during it. They're not doing anything. So you haven't. And, you know, before they report Q2, you saw, oh, my gosh, inventory ramped up quite a bit in Q1. And there, you've got Max Lanier claiming an M-A-E, like one of the things that, to me, again, as a simpleton who's studying this company from the outside, I was worried inventory had gone from $320 million to $4.4. And you had a situation where sales are slowing, inventory is ballooning. They're going to have to take a huge write down all this.

And to me, one of the things I saw that I liked was, hey, inventory actually went from 320 to 250. Yeah, as you said, yes, it's a little higher than we would like, like, but we don't have a company that's over here choking on inventory that they can't move and that's just building up and like the cycle needs to turn tomorrow or else they're going to just have to take huge write down. So that was one of the things that just jumped up to me. Let me, let's move away from the current cycle.

You know, if I just, again, I'm a dumb out. outsider. 250 million in EBIT in 2021, 250 million in EBIT in 2022. If we kind of fast forward, and let's say 2025, we're at, and this industry is famous for whipsawing from absolute peaks to absolute troughs, right? But 2025, we're at the mid cycle. What do you think earnings for Silicon Motion kind of looks like in a mid-cycle, normalized environment? Honestly, I'd be surprised if they're under $6 share by that time. They didn't want the $6 share last year. And that one So the last two years They did a little bit

About $6 a share It wasn't maybe last year Was pulling in demand From future years At the inventory built But 2021 was much more Realistic They were doing about a billion dollars

in revenue Their market shares in building Even now I believe They're market shares in building So I don't control of revenues down More than Silicon motions We haven't got so much Commentary from them

Because we haven't been Confiscals over last year They have a little bit of You know Commentary inside their earnings release But not much but it does appear that they're bullish on their strong design momentum.

They've been increasing from under half. It used to be their SSB business with less than half of that was OEM. Now it's two-thirds. OEM business is warm-term, sticky business. Once you win the SLAT, you're very likely to win the next SLAT when it's replaced, and the SLAT lasts a whole point. So it's a good business to be in. How much OEM's need will depend on their end market,

but it's a good business to be in. long term, they've been, they've been increasing their market share, winning a market share. So I would just say, what are the risks? Let's put risks for a second. They have two major big customers. I mean, their major customers are the flashmakers and the module makers and the OEMs. In the flashmakers, Micron is 25% customer and SK-Hinex is a 25% customer. So Micron is a 25% customer.

It's been a long-term relationship. Micron had recently got banned from selling into China, which is about 12.5% of business has been banned. They do 25% of the business in China, and 12.5% half of that business Micron has said is subject to the ban of infrastructure, the buying from them. So Micron, which is a major customer, is going to be under some pressure. They're probably a place with other customers, et cetera, but they're under pressure. And SK-Hinix is a 25% customer. A lot of that 25% customers with SK-Hinex recently at the end of 2021, what entails memory division. They're actually in the process of buying it.

They bought it. They have some control, not full control. It's a multi-year deal. Whatever it is, it's complicated. But they have Intel's former NAND division. S.K. Hynix famously used to use Silicon Motion for the UF, for the EMSC division. They still do. But when they transit to UFS, they decide to insource.

And I'm sure there's some risk that they were not successful they're endorsing. SK. Hinex is not a major player in the UFS business. Silicon Motion is through their Microndale and others as well. S.K. Hanukes did not do well with their insourcing their own controller. I don't know if they regret it or don't. But there's some risk, of course, the SK Hynix down the road will take the Intel business and start insourcing that as well. That's a risk they always have to.

The major competitors here are Fising and Marvell are purchase controller makers and Silicon Motion and the insourcing from the flash control. Over time, it appears that the push to insource have been. going away. I believe now during the downturn, the flashmakers are even more looking to outsource. They want to cut their expense that they don't need. They want to outsource as much as they can. So the control of the division is one of the things. There's been discussion, rumors, pretty many rumors, some up, but for the last year or two of the rumors that Samsung might be finally looking to outsource some of their controllers. And that's a major chunk of the market.

That's 40% of the flash market right there. So that would be very important. That would be a major growth story, so there's both reward possible from further outsourcing and there's risk possibly, especially from S.K. Heinz's purchase of intel of insourcing. Last time, SK Heinz insourced, there was a major, there was a good chunk of, of Silicon Motion's revenue at the time. I think they were 33% customer. Silicon Motion grew through it and came out storming the other side. If it happens again, I believe they'll grow through it as well. I'm not so concerned about it. I think outsourcing, more outsourcing is more likely than more insourcing.

That's one major risk. The second thing I would highlight on a long-term basis is that Silicon Motion has yet to crack into the enterprise market. They've been working in it for a few years. I believe this year, the first year where their enterprise controller is maybe able to be a player, and they want to start breaking in in 2024, 2025 and start working out. If they're able to do that, that's a greenfield opportunity for them. where they head on, start competing more with Marvell, who's mostly enterprise controllers.

In the consumer space, they won all that business from Marvell. I think that they have a good chance of winning the enterprise business for Marvell over time as well, and that would be tremendous growth for them as well. So I think there's a lot of good things to look forward here. When the cycle turns, I think we're looking at $5, $6 share on a normalized basis with the possibility of a major further growth more if they break into enterprise base.

So I think that that's pretty good. You know, and I was going to say halfway through that. And let's not forget the amount of cash they have on the balance sheet. They're trading at $60. About $17 of that is, you know, cash and easily convertible receivables, et cetera,

minus their liabilities. They have no debt. Take out all the liabilities. They have $17 left of cash and convertible cash assets. So we're looking really at a share price of a little bit more than 40. on something that down the road, I believe, not too long from now,

maybe even next year or the end of the next year, we'll be looking at $5 a share earnings on what's essentially X-cash $40 a share. And the cash just continues to grow. You know, the companies that claim to be profitable and the cash doesn't seem to ever show up, and then this companies like this, they keep on adding cash on the balance sheet, hand over fist, in good times, hand over fist,

in bad times, not hand over fist, but they're still adding cash. And that's something I like about the locomotion. And I just want to underline that again. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions.

They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model.

So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. And I was going to say halfway through, we actually discuss the Samsung outsourcing and the insourcing risk a lot in the first podcast. So again, I would just refer people to that. And just last thing, because we're running long and I've actually got to get ready to get some dinner plans and get some after after dinner work done.

But just last thing, you know, one thing that does strike me is Silicon Motion just tried to sell themselves to Max Linear, right? Or this is a company now that has tried to sell themselves before. do you think they're you know two years down the line the option on the specific performance plays out the cycle kind of normalized do you think they're a seller again or do you think max linear just kind of bold them over with such a big premium that they had to take it and i'm no idea max linear approaches them not the other way around i don't know it could be that they're the CEO is no ready to retire sell i don't know hard to know i just want to end one statement it's one thing going back to arbitration for just one second um people are understandingly you're very interested in knowing and how the arbitration is going and what's doing it, and they're going to want to follow it closely, like they did with the Twitter Twitter saga. And I unfortunately will have to tell you that other Singapore rules, arbitrations are confidential. Confidential means that not the arbitrators and not the parties are allowed to reveal. The hearings are private.

Nothing can be revealed about what happened. The briefings are private. You're not going to be able to see the claims or the counterclaims. And in fact, even the very existence of arbitration itself is confidential. There are exceptions. And one of the exceptions is if they must reveal it. under law or regulation. And they will have to reveal that there is arbitration undergoing.

Both sides will have to reveal that as being material to the businesses. We might be able to get some information like what the size of the damages claimed is. Maybe we'll be able to see some of the briefings. But much of what's happening is going to happen underneath the water line. And we will not see what's happening until the water comes out, which will be public again because it'll be material one way or the other. You know, as a New York-based person, it's actually nice to hear that because, you know, know with Twitter, we would, I know you and I were both listening to like every hearing,

and the hearings would start at like 10 a.m. and one, end at 1 p.m. So if you take that over to Singapore, that means the Singapore time. It would start at like midnight New York time and end at 3 a.m. And we're, we're about to have a kid. I'm not sure if I really want to be listening to arbitration. I would do it, but I'm not sure if I'd really be thrilled to listen to arbitration. Well, Bordecai, like, this has been absolutely fascinating. I really appreciate it. I'll include a link to our first episode again so people can go listen. We did, we talked a nice bit about fundamental value there, but we really talked a lot about fundamental value there. So people can go listen to that.

I'm going to follow up on the specific performance angles, and you and I will obviously keep the conversation going offline, and listeners will just have to wait for the third podcast to hear about the results of that. Absolutely. I really appreciate all the great work you've done on this, and I really appreciate you coming back on for the second time. So looking forward to the third one. Okay.

Always good speaks with you, Andrew. Have a nice thing. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.