Tessera Reaffirms the Superiority of Its Intellectual Property Business
Open Letter to Stockholders Explains Why Starboard’s IP Plan Will Destroy
SAN JOSE, Calif. -- May 06, 2013
Tessera Technologies, Inc. (NASDAQ:TSRA) ("Tessera" or the "Company") today
issued a letter to stockholders in connection with the Company’s 2013 Annual
Meeting scheduled on May 23, 2013. In the letter, Tessera explains the merits
of its intellectual property (“IP”) business model. The Company provides a
detailed rationale why the core elements of its IP strategy will generate a
higher value for stockholders versus the flawed plan proposed by dissident
stockholder Starboard Value LP (“Starboard”).
“It is clear there are two distinctly different strategies to choose from in
monetizing IP, Tessera’s or Starboard’s,” said Richard S. Hill, interim CEO
and executive chairman of Tessera Technologies, Inc. “Starboard’s strategy can
best be analogized to cutting down the apple tree to harvest the apples. In
the Tessera model, our engineers constantly enrich our patent portfolios. We
harvest the apples while continuing to nourish the tree.”
The full text of the May 6 letter follows:
Dear Tessera Stockholders:
I write this letter to impress upon you the importance of your decision in the
upcoming Annual Meeting of the Stockholders of Tessera Technologies, Inc.
(“Tessera” or the “Company”) to the value of your investment. The newly
reconstituted Board of Tessera and Starboard Value LP (“Starboard”) offer two
distinctly different approaches to the business of monetizing intellectual
property (“IP”). In this letter I would like to convince you that the current
leadership team at Tessera is executing the right strategy to maximize the
return on your investment in Tessera.
Tessera’s Stellar Track Record of Innovation
Tessera is a high technology company that was founded to deliver innovative
semiconductor solutions that enable the connection and integration of
microchips into microelectronic products. That core mission is more valuable
today than at any time since the Company’s founding. In the industry it is
well understood that semiconductor technology needs to double in performance
every eighteen months, without increasing its cost, in order to keep pace with
the demands of the market. This principle is known as “Moore’s Law.” Although
this rate of progress has been achievable in the past by improvements within a
single semiconductor chip, going forward it is only achievable by stacking the
chips and interconnecting them. This is Tessera’s core business, and the
Company has built, and continues to build, a series of enabling technologies
to capture the growth associated with this fact.
I’d like to give you my view why I feel our Company is better positioned and
has more potential value than ever before.
Success in the eco-systems of electronics is dependent upon the ability of
engineers to continue to provide features to consumers in electronic products
that are better, faster and cheaper than the ones they currently use.
For example, Tessera’s IP played a key role in transforming the brick-like
mobile phones of the past into the slim, sleek phones you use today. Today we
all marvel at the performance of the devices we use daily, but not a day goes
by that we don’t note some dissatisfaction of what the device just won’t do.
“My device is too bulky; this battery life stinks; it takes too long to
download my data; I can’t see my screen in the sunlight; my phone is so heavy
in my pocket; this notebook is too thick and heavy” – and a thousand more
complaints, all waiting to be solved by engineers around the world.
Historically, many of these problems were solved by semiconductor companies
whose innovations made transistors smaller and smaller. In 2013, that path has
become too costly to travel, and the frontier of technology improvement has
moved – from making transistors smaller and smaller, to interconnecting
multiple chips into a single package, enabling higher performance.
Your company, Tessera, has built a core engineering competency which enables
interconnections that are better, smaller, faster and cheaper than any other
company in the world. Through both internally created and strategically
acquired portfolios, our IP allows our customers to enhance both their time to
market and the product performance that they deliver to the marketplace.
Tessera’s IP Business Model Treats Our Customers as Valued Partners and Helps
Solve Their Problems
Tessera’s IP – patents, know-how, and trade secrets, all of which we
continually develop – constitute a highly valuable and marketable asset that
can be sold to product developers all over the world to enhance time to market
and improve product performance. That is the business of Tessera. We help our
customers by bringing tangible value to them. We are partners in technology
Starboard’s Risky Patent Troll Approach Views Customers as Defendants
Starboard’s plan proposes a very different direction for Tessera’s business
model that we strongly believe is not sustainable and will destroy stockholder
value. Starboard is an investment management company that specializes in
activist campaigns to gain board seats. Recently it has been targeting IP-rich
companies like Tessera. Starboard believes Tessera should convert to a highly
controversial business model known as “patent trolling.” According to the
Congressional Research Service, this “business model focuses not on developing
or commercializing technologies but on buying and asserting patents against
companies that have already begun using them.” Starboard’s vision is to strip
the engineering, marketing and sales from IP-rich companies, sign contracts
with contingency fee-based legal bounty hunters, and assert patents against
any unsuspecting companies, large or small, who might trespass on their
Many businesses hate patent trolls, and lawmakers are listening. Having heard
testimony that “patent trolls are business terrorists” who threaten the
national economy, Congress has put this model under a microscope by conducting
multiple hearings on abusive patent troll litigation. Several Members of
Congress have introduced anti-troll bills. Most recently, in introducing such
a bill this week, Senator Charles Schumer from New York stated that “Patent
trolls are bullying New York’s technology companies, stymieing innovation and
dragging down growth.”
Starboard’s strategy can best be analogized as cutting down the apple tree to
harvest the apples. In essence, Starboard wants to operate a business that
seeks out defendants rather than customers.
Starboard’s Generalizations Don’t Match the Facts
Starboard would have you believe that immediately cutting research and
development (“R&D”) would greatly increase the value of your investment. This
is simply untrue. Of the approximately $33 million we spent on GAAP R&D
expenses in our IP segment in 2012, Starboard would have spent the same $20
million for litigation support and patent portfolio research and acquisition.
That leaves approximately $13 million that Starboard would have “saved” by
abandoning our ongoing development of 3D and xFD stacked chip technologies.
The highly valuable IP related to those technologies is key to our current
relicensing initiatives, as well as for next generation IP business. That $13
million investment is already bearing fruit – helping us secure license
royalties for approximately $40 million in 2013 alone – essentially tripling
our 2012 investment.
So it is clear there are two distinctly different strategies to choose from in
monetizing the IP. In the Tessera model, our engineers constantly enrich our
patent portfolios. We harvest the apples while continuing to nourish the tree.
We are harvesting our IP through collaborative partnerships with our
customers, where our expertise is a value-added service. We constantly refresh
our understanding of the needs of our customers in order to know what IP to
develop in the future.
Being a valued partner and resource to our customers has allowed us to
generate over $1.7 billion in revenue since inception, with at least $130
million -$150 million in recurring revenues expected in 2014, out of an annual
run rate of at least $180 million -$200 million for our IP business. Contrast
that to patent troll Unwired Planet’s (“UPIP”) revenues of $35,000 in
aggregate, for the five quarters between late 2011 to year-end 2012.
Starboard likes to continually confuse the performance of Tessera’s IP
business with the poor performance of the Company’s DigitalOptics investment,
which has been a drag on Tessera’s performance over the last two years. The
Company has been forthcoming in admitting that the DigitalOptics investment
mistakenly defocused from technology creation and focused instead on
establishing a vertically integrated manufacturing capability. It was a
mistake. That investment is being refocused back on the core competency of
Tessera – technology development – and the Board that is now in place knows
how to change course and maximize the return to the stockholders for this
Let’s not confuse the real decision here in this proxy fight: It is not about
fresh perspective or finding an independent Board: that has been done already.
It is not about finding a skilled management team: that has been done, too.
What it is about is what IP monetization business model do you want to invest
in – Tessera’s or Starboard’s? They are distinctly different. The leadership
team and all the employees know how Tessera’s model works. They believe in it
and it is part of the Company mission and defines the culture: “Know and
understand your customer’s needs and deliver world-class innovative IP to them
to shorten their time to market and lower their costs.”
Starboard has chosen a different path to IP monetization. It can be stated
simply. Buy companies with IP, strip the costs, move on from the felled tree
to the next tree to get more IP and do it again. Starboard’s strategy has
sidelights that include acquiring patent portfolios from large technology
companies on a contingency basis and asserting them against defendants using
contingency fee lawyers.
We believe this strategy will not maximize stockholder value, and many public
facts indicate that the strategy is flawed. Starboard’s primary foray into
this field is a case in point. In 2010, Starboard targeted an IP-rich high
technology company named Openwave, now re-named Unwired Planet (NASDAQ: UPIP).
Under the direction of Starboard’s Mr. Feld, who took over as Chairman in
September 2011, UPIP has followed the Starboard playbook and been transformed
into an engineer-free patent troll. Results? UPIP’s total revenue for five
quarters, from late 2011 to late 2012, has plummeted to $35,000 in aggregate.
That is not a typo - $35,000 – that’s thousands, not millions. Under Mr. Feld,
UPIP has been able to acquire one patent portfolio, the Ericsson deal signed
in January 2013, which has not yet generated revenue. But even that deal is
worrisome as UPIP has established a potential $1 billion contingency payment
to Ericsson if a change of control occurs at UPIP in the next three years,
effectively an anti-stockholder “poison pill.”
Generating Greater Stockholder Return with Tessera’s Current IP Model
The numbers do not lie. Average operating margins for the companies with IP
business models similar to Tessera’s are meaningfully higher as depicted in
the chart below:
5-Year Average 5-Year Average
Technology IP Licensing Operating Patent Trolls Operating
Tessera Technologies, 54% RPX Corporation 26%
Dolby 44% Acacia Research 8%
InterDigital Inc 44% Wi-Lan Inc. (26%)
ARM Holdings 26% Unwired Planet (21431%)
MIPS Technologies 19%
CEVA Corp 17%
Imagination Technologies 12%
Average 31% Average (5356%)
I strongly urge you to consider these two highly different business models
carefully. The future of your investment depends on which IP monetization
model Tessera will follow. We believe that Starboard’s model is a risky road
to ruin that will destroy value for stockholders, while our model is the right
platform to create superior sustainable value for our stockholders.
Just as one data point – if you had invested in both UPIP and Tessera at the
time Starboard’s Mr. Feld became chairman of UPIP’s board, your investment in
UPIP would have risen just five percent, while your investment in Tessera
would have grown over 63 percent in the same time period! That’s a return with
Tessera that is more than 12 times greater than a return with UPIP. And that’s
Make no mistake about it. Much of the rise in Tessera’s stock price is a
direct result of the strategic direction of Tessera’s reconstituted Board and
execution by the new management team, despite the fact that Mr. Feld may like
to take sole credit for it.
As interim chief executive officer and executive chairman, I urge you to take
an active role and vote your proxy on the Company’s GOLD card for our Tessera
nominees. Thank you very much.
Richard S. Hill
Interim Chief Executive Officer and Executive Chairman
Safe Harbor Statement
This press release contains forward-looking statements, which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve risks and uncertainties
that could cause actual results to differ significantly from those projected,
particularly with respect to the Company’s strategic plans, market
opportunities, financial targets and projections, value creation and
stockholder returns. Material factors that may cause results to differ from
the statements made include the plans or operations relating to the Company’s
businesses; market or industry conditions; changes in patent laws, regulation
or enforcement, or other factors that might affect the Company’s ability to
protect or realize the value of its intellectual property; the expiration of
license agreements and the cessation of related royalty income; the failure,
inability or refusal of licensees to pay royalties; initiation, delays,
setbacks or losses relating to the Company’s intellectual property or
intellectual property litigations, or invalidation or limitation of key
patents; the timing and results, which are not predictable and may vary in any
individual proceeding, of any ICC ruling or award, including in the Amkor
arbitration; fluctuations in operating results due to the timing of new
license agreements and royalties, or due to legal costs; the risk of a decline
in demand for semiconductor and camera module products; failure by the
industry to use technologies covered by the Company’s patents; the expiration
of the Company’s patents; the Company’s ability to successfully complete and
integrate acquisitions of businesses; the risk of loss of, or decreases in
production orders from, customers of acquired businesses; financial and
regulatory risks associated with the international nature of the Company’s
businesses; failure of the Company’s products to achieve technological
feasibility or profitability; failure to successfully commercialize the
Company’s products; changes in demand for the products of the Company’s
customers; limited opportunities to license technologies and sell products due
to high concentration in the markets for semiconductors and related products
and camera modules; the impact of competing technologies on the demand for the
Company’s technologies and products; and the reliance on a limited number of
suppliers for the components used in the manufacture of DOC products. You are
cautioned not to place undue reliance on the forward-looking statements, which
speak only as of the date of this release. The Company’s filings with the
Securities and Exchange Commission, including its Annual Report on Form 10-K
for the year ended Dec. 31, 2012, include more information about factors that
could affect the Company’s financial results. The Company assumes no
obligation to update information contained in this press release. Although
this release may remain available on the Company’s website or elsewhere, its
continued availability does not indicate that the Company is reaffirming or
confirming any of the information contained herein.
About Tessera Technologies
Tessera Technologies, Inc. is a holding company with operating subsidiaries in
two segments: Intellectual Property and DigitalOptics. Our Intellectual
Property segment, managed by Tessera Intellectual Property Corp., generates
revenue from manufacturers and other implementers that use our technology. Our
DigitalOptics business delivers innovation in imaging systems for smartphones.
For more information call 1.408.321.6000 or visit www.tessera.com.
Tessera, the Tessera logo, DOC, the DOC logo, and Invensas Corporation are
trademarks or registered trademarks of affiliated companies of Tessera
Technologies, Inc. in the United States and other countries. All other
company, brand and product names may be trademarks or registered trademarks of
their respective companies.
Photos/Multimedia Gallery Available:
Tessera Technologies, Inc.
Rick Neely, 408-321-6756
Chief Financial Officer
The Abernathy MacGregor Group
Chuck Burgess, 212-371-5999
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