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Mosaid, Loeb Reach Board Compromise

Date: Monday, September 25, 2006
Author: Christopher Faille, Hedgeworld.com

OTTAWA, Ontario (HedgeWorld.com)—Mosaid Technologies Inc. and the hedge fund that had nominated a challenge slate for its board of directors reached a compromise at the last minute Friday [Sept. 22], expanding the size of the board to accommodate both slates.

The annual general meeting of the semiconductor intellectual property company was first scheduled to begin at 10 a.m., then postponed until 11, and then postponed until 1 p.m. It hardly required the gifts of a certain Baker Street resident to suspect that settlement talks were afoot between Mosaid and the dissident hedge fund, Loeb Partners Corp., New York Previous HedgeWorld Story.

In opening remarks, company Chairman Thomas Csathy spoke of Mosaid as an intellectual property powerhouse. "The spotlight is focused on Mosaid today because this is a very successful company. The debate centers: how to realize that value."

Soon thereafter, Mr. Csathy turned the microphone over to George Cwynar, chief executive. Mr. Cwynar spoke of the various divisions of the companies, especially those which have come under the most fire for underperformance Previous HedgeWorld Story. He said, for example, "While the Systems Division is expecting a soft first half of 2007, we expect the business to be cash flow positive by the second half."

Loeb Partners, which describes itself as a multi-strategy investment adviser, controls 9.6% of Mosaid's stock, together with its affiliates. It had put forward a slate that overlapped with the management slate in four of the seven seats. Its candidates for the three contested seats were: Emmett Murtha, who in the mid-1990s was the director of business development for IBM; Eugene Davis, an attorney with expertise in corporate liquidations and restructurings; and Gideon King, Loeb's senior vice president.

Last week, Institutional Shareholder Services Canada Corp. issued its recommendation that Mosaid shareholders support the management slate. Nonetheless (as Loeb quickly pointed out in a statement) ISS Canada had some positive things to say about Loeb's slate.

"The dissident nominees bring skills that can potentially contribute to the strength of the Board," ISS Canada wrote in its report. "According to the circular, Emmett Murtha brings IP licensing experience. Eugene Davis brings restructuring experience. Many of the companies he has been involved with were eventually sold, but with significant share appreciation. Gideon King, an executive officer at Loeb, brings corporate restructuring and capital markets experience."

Nonetheless, ISS Canada didn't accept the dissidents' argument that the management's performance has been weak of late. It said that over three years, Mosaid has delivered to its shareholders an annual cumulative total return of 62.93%, compared with 17.3% from the Standard & Poor's TSX Capped Technology Index, and 23.3% from the S&P TSX Composite Index.

"We believe the incumbent board will act in the best interests of the corporation and is the better choice for the long term," the ISS Canada report concluded.

At Friday's meeting, after the chief executive's presentation, the chairman came back to the microphone and announced the start of the "official" portion of the meeting. "Very significant developments have taken place in the past 24 hours," he said. "We have been, both sides, actually preparing for an all-out hand-to-hand combat at this meeting," but that had proven unnecessary after all.

The parties agreed to increase the size of the board to 10, and to include all seven of the company's nominees as well as each of the three non-overlapping Loeb nominees.

Monday morning [Sept. 25], the company announced that the agreement also involved the creation of a special committee responsible for the study of strategic alternatives, and that the four-member committee will be made up of two Loeb-affiliated and two non-Loeb directors. The two sides also agreed that the two Loeb members of this committee will be able to demand a shareholder vote on a strategic alternative that they believe is best for shareholder value, but that isn't approved at the board level.

In its statement, the company said that this agreement "is driven by a common interest in maximizing shareholder value and is responsive to shareholder interest in having Loeb Partners represented" on the board.

The intra-day numbers recorded on the Toronto stock exchange Sept. 22 indicate the market wasn't enthused. Mosaid's price (TSX: MSD) rose early in the day from below C$28.50 (US$25.53) to above C$30 by 2 p.m. But 2 p.m. was about the time that Mr. Csathy made his announcement about the combined slate, and the price gave most of its advance back, dropping within minutes to below C$29, finishing at C$28.59 at day's end. A reasonable hypothesis might be that traders had already guessed the gist of the announcement from the morning's delays, and then followed an old rule: buy on the rumors, and sell on the news.