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Zoran-CSR Shareholder Hell Intensifies as Nokia Fades: Real M&A

After losing almost $1 billion in shareholder value in the past five years, Zoran Corp. may reward owners by selling itself at less than 66 cents on the dollar.

Zoran, which makes semiconductors used in digital cameras and DVD players, has fallen 16 percent through yesterday since CSR Plc agreed to buy the company in February. CSR may now ask for a lower price after Sunnyvale, California-based Zoran fell two dollars below the per-share offer of $9.90, according to Jefferies Group Inc. The deal is already valued at a 34 percent discount to Zoran’s sales, the cheapest all-stock takeover in the industry, according to data compiled by Bloomberg.

Chief Executive Officer Levy Gerzberg is trying to sell Zoran after costing investors 71 percent of their money since May 2006. The deal would help fend off activist Ramius LLC, which ousted three directors in March and said the sale may undervalue the company. CSR, facing a profit slump after Nokia Oyj cut its sales forecast, is now buying a company that’s lost money in seven of the past 10 years and projected a drop in revenue after Cisco Systems Inc. discontinued its Flip video camera. Since making the offer, CSR has slid 25 percent.

“It doesn’t look like Zoran has many options here,” said Daniel Amir, an analyst at Lazard Capital Markets LLC in San Francisco. “But putting two failing businesses together doesn’t necessarily make it a good business. It’s two good end-markets, but it just happens to be two companies that have been struggling within those markets.”

Takeover Terms

Bonnie McBride, a spokeswoman at Zoran, declined to comment. James Melville-Ross, a London-based spokesman for CSR, reiterated the company’s statement May 9 that it was evaluating the implications of Zoran’s guidance.

Zoran’s holders will receive American depositary receipts representing 1.85 shares of CSR and own 35 percent of the combined entity after the takeover, based on the terms of the agreement dated Feb. 21. The $13.03 per-share bid was 40 percent higher than Zoran’s price on the last trading day before the announcement, according to the release.

Shares of CSR fell 9.7 percent on the day the deal was made public and have since dropped to a more than five-month low of 326.1 pence yesterday. That’s pushed the value of buying Zoran to about 0.66 times Zoran’s sales of $357 million last year, according to data compiled by Bloomberg.

At the time the deal was struck, Zoran was valued at 1.02 times its revenue, which had already made it the cheapest all-stock takeover of any chip-related electronic components maker over $100 million, according to data compiled by Bloomberg that excludes targets that were majority owned by their acquirers.

‘A Cheap Deal’

Zoran has also declined, with the shares dropping to $7.82 yesterday, or 21 percent below CSR’s offer.

With the deal expected to close at the end of the month, the gap is now the widest of any pending takeover in the U.S. on an annualized basis, according to data compiled by Bloomberg, indicating to arbitragers that CSR will try to get a lower price or terminate the deal.

Today, Zoran fell 1.9 percent to $7.67, while CSR declined 3.4 percent to 315.1 pence, the lowest since November.

“A cheap deal is not necessarily a good deal,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York and was a general partner at private equity firm Blackstone Group LP. “This doesn’t appear to be a good deal for either the buyer or the seller.”

Schroders Plc, CSR’s biggest shareholder, said the deal price must be lowered, according to DealReporter last month. Andy Brough, an executive director at London-based Schroders, declined to comment yesterday.

Proxy Fight

Gerzberg is turning to CSR after losing about $981 million for shareholders since Zoran’s equity reached a high of $1.37 billion in May 2006, data compiled by Bloomberg show.

The drop led Ramius, New York-based Cowen Group Inc.’s alternative asset management unit and one of Zoran’s biggest investors, to try to gain control of the company by replacing its directors.

Ramius, which owns about 9.3 percent of Zoran’s shares, sent a letter to shareholders on Feb. 1 urging them to replace six board members with its own nominees. On March 4, it successfully ousted and replaced three members, winning a three-month proxy fight. Ramius declined to comment.

While closing the deal would help Gerzberg prevent Ramius from gaining more board seats at its next general shareholder meeting, Ramius may balk at the falling price, according to Curtis Watkins, an analyst at New York-based Water Island Capital LLC, which oversees the $2.2 billion Arbitrage Fund and owns about 1.2 million Zoran shares. Gerzberg is set to become a non-executive director for CSR once the takeover is completed.

‘Even Worse’

“You’ve got an already bad deal in that sense, and then you’ve got CSR getting hit even more, which is making an even worse deal,” Watkins said. “It’s going to make it harder for Zoran shareholders and Ramius to stomach that sort of a price. Now that Ramius has three board members on, they’re sort of forced to deal with it.”

CSR, which designs chips and software for Bluetooth-enabled devices, is buying a company that makes the processors used in video recorders and digital televisions. Shares of both companies declined in the past year as CSR’s bigger rivals such as Irvine, California-based Broadcom Corp. and MediaTek Inc. in Hsinchu, Taiwan, offered lower prices, while sales at Zoran’s digital TV unit fell 39 percent, Lazard’s Amir said.

Zoran also said in its May 9 earnings statement that San Jose, California-based Cisco’s decision in April to end its Flip unit will “negatively impact” sales for the rest of the year.

Flip Camera

Cisco’s Flip accounted for about $10 million of Zoran’s digital camera revenue each quarter, according to an estimate by Amir. That’s equal to 12 percent of its total sales in the first three months of 2011, data compiled by Bloomberg show.

Zoran predicted lower second-quarter sales and analysts have projected annual losses this year and next, the data show.

“The market is marking down the deal price,” said Lee Simpson, an analyst at Jefferies in London. “CSR has made some remarks that they might want to renegotiate the price. They have enough leverage to renegotiate or even walk away.”

While CSR expects cost savings of about $50 million, per-share earnings may fall 24 percent this year, the data show.

Nick James, a London-based analyst at Numis Securities Ltd., cut his profit estimate this month on concern that Espoo, Finland-based Nokia and Research In Motion Ltd. of Waterloo, Ontario -- two of CSR’s biggest customers -- may be hurt by slowing sales.

Nokia last week scrapped its full-year sales and margin forecasts for handsets and services, and said revenue at the unit would fall “substantially” short of its projected range this quarter. Analysts project Research In Motion, maker of the Blackberry smartphone, will have its slowest two-year stretch of sales growth since at least 1996, Bloomberg data show.

Buying Zoran may not help shareholders of either company recoup their losses, according to Keith Wirtz, who helps oversee $18 billion as chief investment officer for Fifth Third Asset Management in Cincinnati.

“Given the fact that both companies are struggling, I would worry that the combination of two weak companies might not translate into one great company,” said Wirtz.

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