Wednesday, July 22, 2009

Valuation of Aptina

Micron has published its 10-Q form with information on Aptina sale. The report says the following on the transaction:

"On July 10, 2009, the Company sold a 65% interest in Aptina Imaging Corporation (“Aptina”), a wholly-owned subsidiary of the Company and a significant component of its Imaging segment, to Riverwood Capital (“Riverwood”) and TPG Capital (“TPG”). Under the agreement, the Company received approximately $35 million in cash and retained a 35% minority stake in Aptina after Riverwood and TPG contributed significant debt-free capital to the independent, privately-held, company. The Company also retained all cash held by Aptina and its subsidiaries. The Company will account for its remaining interest in Aptina under the equity method. The Company’s Imaging segment will continue to manufacture products for Aptina under a wafer supply agreement and will provide services to Aptina. In the third quarter of 2009, the Company recorded a charge of $53 million, the estimated loss on the transaction, to write down certain Aptina intangible assets and property, plant and equipment to estimated fair values."

So, after the transaction Micron retains 35% of Aptina and got in exchange $35M. Assuming Aptina employees stock options are about 15%, Riverwood and TPG hold 50% of the new company and paid $35M for that. This means the total Aptina valuation is about $70M.

Another possibility is that employees stock options are accounted as a future dilution, so Riverwood and TPG paid $35M for 65% of Aptina stock. In that case the total valuation of Aptina would be $54M. In both cases it's much lower than Omnivision's valuation. Am I missing something?

Correction: After discussing it with a reg. accountant it's clear to me that without knowing the exact amount of cash taken from and given to Aptina there is no chance to calculate the company value, not even approximately.

22 comments:

  1. You've got it right. There is a 6x spread between OVTI ex cash and where the private equity guys bought Aptina. Before you say what a great deal that was, remember that the buyer got a look at Aptina's backlog and technology road map. Also, remember that the buyer is going to have to contribute $$$$ to keep the boat afloat as nobody is making money right now.

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  2. you left out this- "Riverwood and TPG contributed significant debt-free capital to the independent, privately-held, company."

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  3. Yes, and also Micron swept all the cash out of Aptina. Plus they "own" 35% of the the funds put in by the venture groups. They also get some nice write downs for taxes should Micron become profitable. It is tricky to value all of this. It shows that sometimes having a less diligent public invest in your company can lead to better valuation -- something I am sure Micron and the venture groups are hoping for in the future.

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  4. If you look further down on the 10Q you will see that Aptina has had an operating loss of $100 million PER QUARTER! for the past two qtrs.
    There is something big wrong in pricing or manufacturing (bad yields).
    How would you value this thing if it will take $100 per qtr to keep it afloat?
    Figure two years to turn it around...that's $400-600 more money that will go in to make it profitable, if that is possible.
    Sounds to me like they potentially paid a half billion dollars for Aptina....or spent $35 mil for the option to spend $500 mil more. Crazy.
    Since they didn't take on the physical fab, they could walk away from the business fairly simply if they determine that it can't be turned around.
    The operating loss has picked up steam to the downside in the past three qtrs. I'll be interested to see how this works out.

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  5. Good analysis - Anon - about the "real options" deal that Riverwood and TPG may have struck... i.e. $35M option to spend another $500M. So, extending that argument the key question is whether there is a market big enough to allow Aptina to turn around. The camp may be evenly split. Mobile phone, DSC and webcam markets are squeezed on margins. The key market for Aptina to focus on is outside of these three markets to make some money. It is heartening to hear that XBox/Natal will have Aptina's sensor. That's the way to build some margins and turn around the biz.

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  6. When you have a product mix of 50% megapixel and above and gross margin is 2%, it tells me that someone gave away parts -or- more likely yields are out of control.
    I think Omnvision just walked that valley of death (no proof) to get yields under control. It took two years. I just wonder if Aptina's new owners have that kind of staying power. They would have to recognize that even if they spent the time and money and still ended up behind on technology that the business might never be profitable.

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  7. @ you left out this- "Riverwood and TPG contributed significant debt-free capital to the independent, privately-held, company."

    I was talking about pre-money valuation of Aptina. All the added investments including the commitment to cover the losses are probably a part of the spin-off agreement, but we get too many unknowns if we account for this.

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  8. You are trying to figure out how an apple would taste if you treated it like an orange. Ultimately you seem to want to compare the market cap of OVT with the an effective valuation of Aptina. This does not compute.

    You could try to look at enterprise value but there is not enough information to try to figure that out either.

    I don't think you will ever get all the information you want on this transaction unless you know some top level person at Micron or a partner in the VC firm. And I think it is intentional. No one wants anyone to know the real present cash value or enterprise value of Aptina because that will bias any future valuation.

    I thought it would have been good for Samsung if they bought Aptina. Alas, that did not happen and perhaps it couldn't happen. Probably Micron is looking for future IPO upside and a built-in wafer customer. Still, it was interesting to contemplate.

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  9. Yes, you are right. After discussing it with a reg. accountant it's clear to me that without knowing the exact amount of cash taken from and given to Aptina there is no chance to calculate the company value, not even approximately.

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  10. I thought it would have been good for Samsung if they bought Aptina. Alas, that did not happen and perhaps it couldn't happen. Probably Micron is looking for future IPO upside and a built-in wafer customer. Still, it was interesting to contemplate.

    Hmmmmm. You'd be dealing with two entirely different CMOS processes and two different pixel design approaches. Would it even be possible to merge the two product lines or get R&D synergies?

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  11. It is not about the technology. It is about customer base and market share. The technology implementation is just a detail. Sometimes you just gotta think bigger.

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  12. Aptina has been on the selling block for a heck of a long time (something like 2 years). Aptina management would have approached everyone in the business at some point in the game. I'm pretty sure that Samsung, OV, Toshiba were approached, not sure about Sony and ST. Being bought out by a couple of VC types probably wasn't what Aptina had in mind from the start. Despite the outcome, it seems no existing player wanted to buy Aptina in order to become world number one in market share. Would have worked for either Samsung or OV, possibly even Toshiba

    As a side note, no one has done any major deals in the last few years. The only deals I can think of that are worth mentioning are, Samsung buying out Transchip, Himax Imaging buying the ESS team, Dongbu investing in SETI, and Hynix investing in Siliconfile.

    Aptina also merged some engineers from Chipnuts in China. I still can't figure out why Aptina would be buying into this crowd to begin with, just can't see the synergy.

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  13. Re: Himax Imaging buying the ESS team

    Actually, Himax got a part of ESS team. As far as I know, BYD got a part too. Yet other people are spread between other companies.

    If we talk about other that kind of deals, Dongbu hired about 60 people from Magnachip imaging team to jump start its own sensor product development.

    By the way, I'm not sure that Dongbu invested in SETi. There are conflicting reports on that. Some say that Dongbu has never invested, others - that Dongbu has divested from SETi already.

    While we are at Korea, MtekVision spun-off ClairPixel and invested in it.

    Talking about Far East at large, there are quite a few companies dreaming to enter image sensor market. Unfortunately, no one of them has the scale to swallow Aptina. The big size of Aptina is the main reason that the deal took so long time, in my opinion, anyway.

    On the West side, Melexis bought whatever remained from Smallcamera. Micron bought Avago imaging business 3 years ago, if this counts.

    A part of the problem is DRAM market collapse. If not this, Cypress-ProMOS-MoselVitelic venture could be a successful example. Hynix could be more active too.

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  14. Oh, I forgot, Sigma bought Foveon less than a year ago - another deal. Not the size of Aptina, though.

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  15. Now that Aptina is out of MU would it be reasonable for OVT to make an offer to the new owners for a stock deal to acquire Aptina?
    Could OVT buy the whole banana for 5 mil shares? The PC guys make some quick money and stay in for 10% of what would likely be a 50% share profitable player in the imager/camera module business.

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  16. RE: Dongbu hired about 60 people from Magnachip imaging team

    SiOnyx got a piece of Magnachip too, the pixel cell team (ASPD) in Oregon

    http://www.reuters.com/article/pressRelease/idUS145734+27-Jan-2009+BW20090127

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  17. Was Micron into image sensors before buying Photobit? How much did they originally pay and how much money have they lost over the years? It looks like a very big loss.

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  18. I remember MU trying to make image sensors out of 64K DRAMs back in the early 80s...yes that was 64K bits. I actually have a clear plastic packaged DIP 64K chip that was represented as being used as an image sensor. the idea was to use DRAM with bad bits as image sensors since they could tolerate a few bad locations.

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  19. Is Aptina essentially just Photobit repackaged or did Micron already have significant image sensor development in progress? Why did Micron fail to make a good business out of Photobit?

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  20. Micron did make a good business out of photobit - Micron had up to 40% market share at peak. The image sensor group management damaged the business, by pushing to spin-off the company while at the same time (1)losing employees who were being forced to relocate to San Jose, and (2) the world wide economy was tanking.

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  21. It is not a good business even if you have 40% market but still loose money. It sounds like Photobit was not the problem but rather the way it was run after acquisition. Did Photobit ever break to profitability? More money earned than was invested?

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  22. Photobit Technology Corp was nicely profitable. Photobit Corp, the parent and which operated the consumer sensor business ran at a good gross margin but all profits were plowed back into R&D.

    The sale of the company was driven by a few key investors that as a group had majority control and were hurting due to the strong electronics recession of 2001. They desperately needed cash and sold their shares at a loss. Most other investors either got their money back, or made a nice profit. Some individual late investors (my mother included) took a small % loss on the sale.

    After the Micron acquisition, Micron decided to close the Photobit Tech business operations and move all those people to the consumer sensor business.

    I think early on, Micron management made a number of business decisions that I would not have made, but they had paid to own the company. I was asked to resume a technical role so I did. It was difficult for me to have "bosses" that did not understand the technology or the business and there were a lot of politics all of a sudden. I left after about a year.

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