When will the investors in Transwitch (TXCC) decide that Dr. Santanu Das (Dr. Das around here, we like the way it sounds) needs to go?
Yet another incomprehensible acquisition was announced today, Mysticom (a truly unfortunate name), which specializes in quad retimers, a technology that was hot in 2002.
Quote from Das:
… As we move into our next series of Envoy, PHAST, and EtherMap products with 10 Gigabit SONET/SDH and Ethernet interfaces, we need to continue to integrate SerDes and PHY functions. External IP for 10 Gigabit SerDes and PHY is not readily available, and Mysticom’s proven capability in analog/mixed-signal design and in these technologies will enable TranSwitch to continue it strategy of integrating SerDes and PHY capabilities in its next-generation products
If this really an IP acquisition then why are there positive cash-flow targets for the group? From the release…
TranSwitch is expected to acquire the Israel-based company through the issuance of approximately $5 million of TranSwitch Common Stock. Upon the satisfactory achievement of certain revenue objectives and a positive operating cash flow over the next 12 months, TranSwitch will pay up to an additional $10 million in the form of TranSwitch stock or cash, at its option.
This implies that Mysticom is not cash flow positive today. The design cycle for these products is twelve months, which means whatever Mysticom needs to execute on to hit these targets should have already happened. These devices are used in 10GE modules, a market where 75% of the volume is with Cisco, and Cisco makes the decision about whose chip gets used in the module. We are betting that Mysticom was not at the top of their list.
Over the last three years Dr. Das has managed to liquidate $80MM shareholder equity by pursuing me-too products in me-too markets. This included forays into Circuit Emulation, a big one into Ethernet over SONET/SDH, DSLAMs, Carrier Ethernet switching- and let’s not forget the high performance private equity investments they made in companies like Onex. Customer feedback indicates that execution has not been on par with their competitors. We are ‘mystified’ by the patience and tolerance investors seem to have for Dr. Das’s leadership.
What is truly remarkable is that after years of unprofitable performance and total annihilation of shareholder equity, the company is still valued at around 6x revenue. Who wakes up in the morning and says- I’m going to add more Transwitch to my portfolio today!
Hi Andrew,
“We are ‘mystified’ by the patience and tolerance investors seem to have for Dr. Das’s leadership.”
As the largest shareholder of TranSwitch, I am probably more qualified than anyone to answer that question. Whether that is a good thing or a bad thing, I guess we won’t know for a while.
In order to fairly evaluate Das’ performance, I think you have to compare it with comparable companies and I think that’s where your analysis falls short. Sure, TXCC has “liquidated” a substantial sum of shareholder equity over the past few years. Has the track record at Vitesse or AMCC or PMC been any better? The truth is, Das hasn’t so much “liquidated” shareholder equity as invested it. The company has spent over $150mm in R&D over the past three years, and that is where shareholders’ equity has gone. Time will tell whether he has made the right bets. There’s no use debating that here. You’re an investor and I’m an investor and that’s what the stock market is for.
“What is truly remarkable is that after years of unprofitable performance and total annihilation of shareholder equity, the company is still valued at around 6x revenue.”
Before dissecting this statement, I would be interested in what shares you think are attractive and why. I mean, have you actually looked at the retained earnings account at Vitesse or PMC? Also, how would this so-called “annihilation of shareholder equity” impact on the investment prospects of the company going forward?
“Who wakes up in the morning and says- I’m going to add more TXCC to my portfolio today!”
Well, er, ummm, actually I do. That being said, I also think about whether I should be buying shares in Vitesse or PMC as well. Think back, for a moment, to the spring of 2000. How many people woke up each morning thinking I’m going to add more TXCC (or VTSS or PMCS or AMCC or CSCO or JNPR or LU or NT or whatever)? Lots of people, no doubt. And where do you think they are now?
From what I gather you have spent the bulk of your career in industry before very recently embarking upon an investment career. Not a lot of people wake up thinking about TXCC, and that’s a good thing not a bad thing.
As for the rest of your article,
1.) Yes, it would seem that Mysticom is not cash flow positive today. I think the next few months will see whatever expense reduction is necessary to get Mysticom to be cash flow neutral. Given the purchase price it should be obvious that Mysticom isn’t exactly knocking ’em dead and that they aren’t about to get a monster order from Cisco. Whether it’s a good acquisition or not remains to be seen, and you are correct when you say that Das’ record here has not been good. Mysticom was purchased as much for its engineering talent as its IP. TranSwitch, like the rest of the industry, isn’t exactly enjoying fat times, and they don’t exactly have the balance sheet strength to make an acquisition that will drain cash.
2.) I would be interested in knowing why you think their products are “me-too products in me-too markets.” Who, in your mind, has come out with the leading products for the next generation? It seems to me that it wasn’t so long ago that Vitesse was boasting about their leadership in the EoS markets. To they extent they ever had a lead there, they have totally lost it.
3.) You’re right, execution has been a mixed bag. But has it been any worse than the competition? AMCC has misstepped with a lack of focus and multiple questionable acquisitions. VTSS has bungled their foray into the EoS market and disastrously mishandled their balance sheet. PMC, according to you, overpaid for their recent acquisition.
Lots of interesting points on other companies and I would venture that you and I agree far more than we disagree. But this is an post about TXCC, and not PMCS or AMCC. TXCC is not alone here and represents a situation that exists broadly in the component industry. Unfortunately, I think TXCC is the worst example.
As for the reference to not following the herd and being the first buyer, we couldn’t agree more.
“Who wakes up in the morning and says- I’m going to add more TXCC to my portfolio today!”
I for one. Herb Chen obviously has. A lot more folks will, in my opinion, and the ones doing it first will be the biggest winners.
Come to the office this morning… hmmm…. 85 new referrers from http://finance.messages.yahoo.com/bbs?…..
It must be the TXCC perma-bulls again!
I didn’t listen to the call (not sure TXCC would have let me on). I did look at the release (no guidance there) and saw more of the same story.
Forgetting about mo-mo investing (thats what the Yahoo boards look like to me) – what sort of revenue levels are you guys expecting in 2 years in order to justify the valuation, and what do you believe is going to happen to create that?
I really wish I could like TXCC as I’m very familiar with their customers and products. I simply question the mgmt and the valuation.
Any details provided on the acquisition during the call?
Finally, I have been deleting comments on this page that add little value and are not constructive. I will not delete comments that don’t agree with my point of view.
Andrew, it has been close to 2 years since your original post on Mysticom has your opinion changed any?