Zilog defends refusal of Universal Electronics' offer in letter to shareholder

By Lisa Kerner

Charlotte, N.C., Feb. 13 - Zilog, Inc. responded to a Feb. 6 from Riley Investment Management, LLC expressing its disappointment in the company's rejection of Universal Electronics Inc.'s bid to acquire Zilog for $4.50 cash per share.

While it values its investor's input, Zilog said in its reply that it was unclear whether Riley's comments were made from its perspective as a Zilog stockholder, as a potential acquirer of Zilog in partnership with Universal Electronics or as Universal Electronics' investment banker.

Zilog's Feb. 12 letter to Riley was included in a form 8-K filing with the Securities and Exchange Commission.

Regarding the board's decision to reject Universal Electronics' offer, Zilog said board members "never allowed their own personal interests to take precedence over the best interests of the company and its stockholders." Zilog remains open to alternatives including a possible sale of the company.

"We subsequently learned that Universal Electronics, consistent with its desire to acquire only Zilog's remote business, had entered into a coordination agreement with one of your affiliates (Riley Investment Partners Master Fund, LP) whereby Universal Electronics and your affiliate agreed to split the Zilog business," Zilog chief executive officer Darin G. Billerbeck said in the letter to Riley.

Zilog attempted to meet with Universal Electronics to discuss Zilog's valuation analysis of the proposal, but Universal Electronics cancelled the meeting one hour before it was to start, according to Billerbeck.

"We believe Universal Electronics has no interest in the valuation analysis of Zilog's overall business," the letter stated.

Zilog pointed out that prior to the announcement of the proposal, B. Riley & Co.'s analyst had a price target for the company's common stock of $6.00 per share, while another analyst covering Zilog had a price target of $8.00 per share.

According to Zilog, the price targets were established with financial projections for the company's fiscal year ending March 2009, and those projections were "significantly lower than the revenue, adjusted EBITDA and earnings per share guidance Zilog provided on its most recent earnings call."

Zilog defended its decision to raise director compensation, citing guidelines from Compensia, Inc. and a careful review by the board's compensation committee. The company's stockholders approved a function- or role-based fee structure for director compensation.

Had the new compensation arrangements been in place at the beginning of Zilog's 2007 fiscal year, the company would have realized a cash savings of $64,000, the letter said.

Riley had questioned the board members' rationale in granting themselves raises and boosting meeting fees by 50% (after the first four meetings of the year).

"To put Zilog's board fees in perspective, if just the fees paid to the board members were eliminated (not all other expenses associated with the board) it would add $0.02 per share to earnings, which is worth $0.90 per share in the stock price at the Universal Electronics' valuation and apparently even more per share at your valuation," Riley's Feb. 6 letter said.

Cutting board fees in half would add more than $0.45 per share in stock value, according to the investor.

Riley, a 6.2% shareholder, noted that Universal Electronics' offer would value Zilog at 8 times EV/EBITDA and 45 times earnings per share.

The investor said the company's performance has been disappointing and noted that nearly 50% of Zilog's revenue is generated from "legacy products that have an uncertain outlook" including "a universal remote business that has significant customer concentration, a situation where flash growth has slowed to a crawl."

The investor also cited the more than $80 million in GAAP net losses generated for shareholders since Zilog emerged from bankruptcy.

Based in San Jose, Calif., Zilog is a supplier of eight-, 16- and 32-bit microcontroller and microprocessor system-on-a-chip products.

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