How much will you (generic) pay for S3?
continuation of takeout price for S3.
Why buy S3?
1. use their current manufacturing, distribution, infrastructure, and design and firmware talents.
2. anticipation of revenue stream from GX3 and Vortex.
3. Integration of FDJA technology into chipset/low cost board.
4. dominance in segment 0 graphics technology. (ok its low value)
5. Sonic Vibes. (ditto)
6. relationship with USC, Aureal, and FDJA.
7. graphics patent portfolio
Normally companies are valued based upon projected cash flow. a simple way to determine valuation is by using an annuity formula. Using a risk free interest rate of 5.5%, you get the following table:
Valuation yearly cash flow
$100.00 $5.50
$200.00 $11.00
$300.00 $16.50
$400.00 $22.00
$500.00 $27.50
$600.00 $33.00
$700.00 $38.50
$800.00 $44.00
$900.00 $49.50
$1,000.00 $55.00
$1,100.00 $60.50
Another method is to use a PE valuation. This is problematic since operational earnings are likely to be negative in 1998 and 1h 1999.
Assuming $1.00 per share earnings, you can create your own PE multiple.
Using growth rate formulas are also problematic because S3 is shrinking, not growing.
Another way is to value based upon recent highs. DEC recently sold out at $57, when its 1994 (?) high was $73 or 78% of 2/3 year highs. Most recent high of S3 was $23, so takeout price using same percentage might be $17.95.
Given the difficulty in pricing in the graphics segment, how S3 is no longer the industry leader, its lack of leading edge products or viable mid range products, its lack of design wins, lack of revenue visibility, $95.8 mm R&D spending in 1997, potential increase in R&D spending in 1998, sinking ship reputation, further dilution of shares because of engineering options, potential inventory writeoff...
the need to buy S3 is not great.
If you argue that S3 can leverage the $40mm patent portfolio investment into an annuity, use the above table. A 10% annuity ($4mm royalties/year) is a good return in this interest rate environment, but equates only to $72.7mm in valuation.
If you argue that S3's market cap is too high, its cash flow is about $21.3mm positive in 1997. I am very uncertain about this number, since i guessed on many numbers. But if my guess is right, the market cap should be about $400mm. Using 1996 numbers, cash flow (from operations) was $34 million, so valuation might be $550mm.
So, if i were management, i would be using these arguments to accept or reject bids.
Clearly if they get $20/share bid, they should accept. If they buy nVidia, they then have a firm revenue stream to value the company thru 1 more year, so $25/share bid would be what they would want.
if they get $10/12 bid, They will likely reject it offhand, but actually should consider it, and try to get it up to $17.95, which i believe is a fair "takeout" price. The reasons for a takeout, are NOT compelling.
By itself, right now, I see trading ranges around $4 to $6 in next 6-9 months.
All numbers and calculations are created with much guessing. you are urged to do your own calculations.
still long and suffering...
BL |
