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VTSS Investor Forum

...and the big fish eat the small fish

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In the 2013 VTSS' Annual Report

http://files.shareholder.com/downloads/ABEA-4EMVKT/3432670419x0x716964/331522E0-CCEB-4C93-9B88-05A5B1703B9E/Vitesse_2013_Annual_Report.pdf

on pages 19 & 26, Cortina Systems is listed as a privately-held competitor. But in a recent news article Inphi announces the intention to acquire Cortina:

http://finance.yahoo.com/news/inphi-announces-definitive-agreement-acquire-110000546.html

and a short time later, Inphi itself is listed as a potential takeover target:

http://news.investors.com/082814-715199-simg-kopn-iphi-lscc-mxl-named-top-five-acquisition-targets.htm?ven=yahoocp&src=aurlled&ven=yahoo

Someone on this page (was it dlog?) cited that BM's ultimate goal would seem to be a sale of VTSS (that seems to be the MO). Right now VTSS seems to be garnering market share in the small, but significant market of interconnection at the ethernet network edge in many different business segments of that network edge. VTSS would have to grow orders of magnitude to go it alone. The industry is overdue for a consolidation. The only thing keeping VTSS alive is the market's willingness to finance almost unlimited IPOs based upon VTSS' "story", and the fact that if VTSS is successful, then the portion of the network that they would own would be very attractive to a BRCM, for example, who might see it as a complement to what they already do, and a chance to own something without the inherent risk of having to fund their own R&D. It's how business gets done at technology's bleeding edge: the market leaders would rather have someone else shoulder the R&D risk and use their excess cash flow to purchase the market winners. CSCO has done this for years. Could we take a stab at valuation seeing VTSS as BM sees VTSS?

BM's highest purchase price was $3.35 (his average is much lower ~ $2.50/share). Now BM is a value investor. He takes downtrodden stocks whose true value is not yet recognized by the market, fixes them financially, and gets them ready for sale at a premium of what he paid for them. Say that he's using Benjamin Graham's rule of thumb of a margin of safty of about 2:1. He pays no more than $1 for every $2 of estimated value. That would be about $6.70, and if he gets another 30% on top of that (splitting the difference with the buyer on the synergies that would be achieved through the combination of the two businesses), then that would result in a per share price between $8 and $9, or around a 3.5x bagger for BM, not including the interest he's getting from the debentures.

...of course, BM's perceived valuation could be higher too; he just happened to buy at $3.35.

Posted by phobos - 8 years ago

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thanks phobos, I applaud you for the amount of information you have brought to this forum.

As time goes on and Vitesse continues to expand, lets all hope Mr. Martin will be striving for something more. With design wins continuing to be strong and spreading out to different situations, it just may be possible. We are still at a point where anything can happen as far as value is concerned.

much appreciated

Posted by christ3opher - 8 years ago | Updated 8 years ago

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I second the sentiments christ3opher stated. You do more in depth stock analysis of VTSS than a Wall street Analyst.

The rumored takeover of VTSS has happened for so many years- let's hope this is finally the time. Markets/IPO market is really hot now. Of course we have to wait for some stock appreciation and hopefully increased Revs/a profit.

Posted by Techinvestor - 8 years ago

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I appreciate the vote of confidense gents. I'm just putting my OCD to good use watching my money (please feel free to comment or critique my opinions - the worst thing that might happen is that I would learn something).

I was just thinking too how the debentures might leave BM with more shares, and the rest of us with more dilution, if we get to the conversion price by the time they are due. I think that even with the dilution from the conversion, we would still be ahead of the game if (when?) the share valuation made it to the conversion price.

BM is really very Buffett-esque in his approach, which gives me confidense all by itself.

Posted by phobos - 8 years ago

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Will Martin be able to convert his debentures?

I have read somewhere here in the past that he will be able to convert shares because of his status but then when I read the latest 13D/A states
" Raging Master currently directly owns in excess of the 9.99% of Shares outstanding."

Martin presently owns 14,312,127 shares which is 21.2% of the Shares outstanding.

Martin and Raging Master are the same owners

Besides being at the required price to covert,
I may be missing something where Martin is able to convert his shares, if so I would appreciate someone pointing it out.

If it is to happen,
" The Debentures are convertible in to an aggregate of 1,919,928 Shares of stock "

Posted by christ3opher - 8 years ago | Updated 8 years ago

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Is there a stipulation about the debentures not converting to shares if the debenture owner is already a 10%, or greater, owner? I don't know.

Posted by phobos - 8 years ago

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http://investor.vitesse.com/secfiling.cfm?filingID=921895-14-1954&CIK=880446

my mistake I overlooked the following:

"it does not include shares of Common Stock underlying 8.00% Convertible Second Lien Debentures due 2014. see item #5 "

phobos, my apologies to you and the board.

Now I wonder,
with the upcoming investor show and tells, the remaining 8.00% holders will be getting some help to push the share price up to the offering price. We have over a month to do so. I bet it could happen?

so, if we reach $4.50, the 8% Loan is able to convert (except, according to filing, Mr. Martins shares are able to convert at any time).

and if we reach $4.95 the Term B Loan with Whitebox is able to convert.
Now, I really wonder if both Loans will be converting.maybe?

Posted by christ3opher - 8 years ago | Updated 8 years ago

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It certainly leaves BM in an eviable position to effect the present and future course of VTSS.

Posted by phobos - 8 years ago | Updated 8 years ago

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It certainly leaves BM in an eviable position to effect the present and future course of VTSS.

VTSS comments unequivocally in the annual report on page 26:

"Our stockholders will experience significant dilution in connection with the conversion of our 2014 Debentures and our Term B Loan. As of November 7, 2013, we had outstanding $32.8 million of 2014 Debentures and $9.3 million of Term B Loan, which indebtedness is convertible into shares of our common stock at a price of $4.50 per share and $4.95 per share, respectively. Full conversion of the currently outstanding 2014 Debentures and Term B Loan would result in the issuance of 9,185,606 shares of common stock. The conversion of our 2014 Debentures and Term B Loan could have a significant dilutive impact on the ownership rights of our stockholders."

...unless of course, the shares don't convert, and they are paid-off in cash.

Back on page 25, they cite that an early repayment may result in significant interest expense:

"Early repayment of our 2014 Debentures may result in significant interest expense. Our 2014 Debentures mature on October 30, 2014. Although we do not have a contractual right to retire our 2014 Debentures early, we will continue to consider opportunistically repurchasing all or a portion of our 2014 Debentures prior to their scheduled maturity by repurchasing the debentures at a premium to the outstanding principal amount of the debentures. Our repurchase of 2014 Debentures at a premium will result in increased interest expense in the periods during which the repurchases occur. In November 2013, we repurchased $13.7 million of our 2014 Debentures at a premium of 7.0% resulting in increased interest expense of $1.6 million in the first quarter of fiscal 2014. If the remaining $32.8 million of 2014 Debentures
outstanding after the November 2013 repurchase were to be repurchased at a premium of 5.0%, there would be interest expense of $3.3 million."

So, I think this explains why VTSS will not be paying this off ahead of time.

Also, I think we have some insight into the sudden need for a public offering a few months back. When it appeared likely that the new product ramp would be matched by the legacy product decline to leave the top-line unmoved up until the October 30 due date, VTSS realized the debt would not convert (unlike what was implied in the annual report), and the debt would have to be paid in cash. Some could probably argue that CRG could have avoided some of the share price decline by emphasizing the really stellar new product growth rates, but even with a better communicator at the helm, I think it would have been a tough sell at that point.

Just in case, I think BM snapped up the debentures, because he might get the interest and (eventually) the principal (worst case), he might get a lot of cheap shares, or he might have VTSS over a barrel and be able to renegotiate the debt repayment on very favorable terms to him (this is how VCs wind up owning the companies they finance - best case). Buying the debt for BM was a no-brainer.

Also, I think that BM was asked to be on the board because not only is BM a very savvy investor and now owns a huge chunk of VTSS, but as the famous quote goes, "Keep your friends close and your enemies closer." BM, the board, and the shareholders are aligned in many ways, but not in all ways. Everyone is keeping an eye on everyone else, and that's probably a good thing. Especially since this is the same company that had NO shareholders' meetings for many years.

Posted by phobos - 8 years ago | Updated 8 years ago

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phobos, not sure if you noticed or not, you and I both posted at the same time yesterday, meaning you most likely did not read my findings ahead of your last post.

thanks for your latest findings, a lot of great information there that helps to explain why those managing Vitesse are doing what they have been doing.

you are absolutely right, nobody trusts this company at all. How can they?

Posted by christ3opher - 8 years ago | Updated 8 years ago

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We agree christ3opher. I just added some citations and a narrative to what you already posted. I don't think we will see an early debt repayment, I think conversion for October is a long-shot at this point (unless someone can really talk-up the growth in new products at the upcoming "dog and pony" shows), and 2016 is a long time from now.

As always, hurry up and wait.

Posted by phobos - 8 years ago

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raging billy already bought about the exact amount of shares in the 10/31/2014s for $3.35 that he will "lose" if he gets paid cash at $4.50. if by chance (and there is a good one) -- VTSS gets over $4.50 in the next 60 days - - it is VTSS option to issue shares or pay in cash - -shares would be most likely. as posted above - -1.919,928 shares to the master bull and a total of 7.3MM shares to all debenture holders.

it is Trick or Treat.

and if he gets paid in cash - -like most of us - -wait a few days and buy the shares sub- $4.50.

the score for VTSS would be getting to keep $32.8MM in the bank and elimination of interest expense by share issuance.

billy knows VTSS is worth over $360MM in any deal going forward --and that gives zero value to IoT and Storage in my FA calcs. -- - $6 at 60MM or 5.14 at 70MM shares.


dW1

Posted by daWiley1 - 8 years ago

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He's ALIVE!!!
Good to read your voice daWiley!
As a gesture of goodwill,a thank you for enduring to us bag holders; I would hope that if opportunity for conversion happens that they pay cash(to master bull) and stocks to debenture holders.
We shall see if the "WE VALUE ALL STOCK HOLDERS" means much.

Posted by GARIF - 8 years ago

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Thank you for your insights daWiley1. It's not difficult to see how quickly vtss could turn. If vtss could get rid of some interest obligations as new product growth accelerates past legacy product declines, it could be the perfect storm; the top line begins to grow as expenses decline - all over the next few quarters. Wow.

Posted by phobos - 8 years ago

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Now there are two of us believing there is a good chance of the share price moving up to conversion price of $4.50, by end of October 2014.

I stated, " I bet it could happen"

daWiley1 stated, "if by chance (and there is a good one)"

if the share price did reach $4.50 conversion
then what about
the share price reaching the $4.95 conversion price for the Convert B Loan with Whitebox, which must be reached by Oct. 30,2014.

Would Whitebox have an interest in seeing the share price reach $4.95 so they then may receive shares rather than cash?

either way, I believe that Vitesse has the option to do whatever it feels. that being cash or shares.

Posted by christ3opher - 8 years ago | Updated 8 years ago

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"either way, I believe that Vitesse has the option to do whatever it feels. that being cash or shares."

lets hope they exercise the shareholder friendly part of their FEELING's so as to minimize dilution. Historically the little guy has gotten the shorter/shortest end of most corporate decisions; perhaps, just perhaps Vitesse will reward all members of the WHOLE.

peace

Posted by GARIF - 8 years ago

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