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Tessera Technologies, Inc. (TSRA), Advanced Semiconductor Engineering (ADR) (ASX): With an Upcoming Special Dividend and Spin-off, Is This Stock Worth Buying?

Over the past few months, San Jose-based digital optics manufacturer Tessera Technologies, Inc. (NASDAQ:TSRA) has made several announcements that have the potential to affect its current and future shareholders. Some of these announcements point to one-off events like the issuance of a special dividend. Others concern the state of the company’s board and could have long-lasting ramifications on its direction.

Tessera Technologies, Inc. (NASDAQ:TSRA)

Meanwhile, Tessera Technologies, Inc. (NASDAQ:TSRA) has also come forward with a small but meaningful share repurchase program that could result in the cancellation of a decent amount of its share float.

Taken together, these events make Tessera Technologies, Inc. (NASDAQ:TSRA) an interesting name to watch. With the company seriously considering a spin-off of its digital imaging and optics division similar to other tech companies, it appears to be at a major turning point. While no one is suggesting that missteps could put it on the road to existential ruin, it is clear that the decisions that Tessera Technologies, Inc. (NASDAQ:TSRA) makes over the coming quarters will have long-term ramifications. With this in mind, investors would do well to take a closer look at what the company has to offer.

Tessera Technologies, Inc. (NASDAQ:TSRA) vs. the competition

Tessera Technologies, Inc. (NASDAQ:TSRA) operates in the high-tech world of camera module manufacturing, digital imaging, and photographic manipulation. Many of its signature camera modules end up in smartphones, and its imaging technology is useful for a diverse base of clients that includes professional photographers and bar code scanner manufacturers. Its two biggest public competitors are Taiwan-based Advanced Semiconductor Engineering (ADR) (NYSE:ASX) and Amkor Technology, Inc. (NASDAQ:AMKR) .

Tessera is not a particularly large company. Its $1 billion market capitalization compares favorably to Amkor Technology, Inc. (NASDAQ:AMKR)’s $690 million figure, but remains considerably smaller than Advanced Semiconductor Engineering (ADR) (NYSE:ASX)’s $6.3 billion. In 2012, Tessera lost about $66 million on $192 million in gross revenue. This compares unfavorably to Amkor Technology, Inc. (NASDAQ:AMKR)’s earnings of nearly $600 million on a total take of $2.8 billion. Although Advanced Semiconductor Engineering (ADR) (NYSE:ASX)’s 2012 profit of $454 million on $6.8 billion hinted at falling margins, the Taiwanese firm remains comfortably profitable. Both Advanced Semiconductor Engineering (ADR) (NYSE:ASX) and Amkor Technology, Inc. (NASDAQ:AMKR) have profit margins of around 4% while Tessera is around (34)%.

Fortunately, Tessera lacks meaningful long-term debt and has more than $400 million in cash on its books. In comparison, Amkor Technology, Inc. (NASDAQ:AMKR) and Advanced Semiconductor Engineering (ADR) (NYSE:ASX) both have about three times as much debt as cash.

Special dividends and a buyback

Given its current cash bleed, it might seem surprising that Tessera has agreed to issue a special dividend of $0.30 to its shareholders of record as of May 23, 2013. The company’s dividend announcement, rather cryptically, points to “episodic revenue” as the source of the dividend’s funding. It is unclear whether this revenue came from a one-off licensing fee, a special contract with a client, or some other arrangement by which the company provided its services outside of the normal channels.

In any event, it represents three quarters’ worth of the company’s normal dividend payments and should provide a nice boost to shareholders. Furthermore, the company hinted that additional special dividends could come on the back of future “episodic revenues.”

Separately, Tessera has indicated that it will revamp its capital allocation strategy and commit up to $16 million to a program of share buybacks that could last for up to a year. At the stock’s current price of $20.50 per share, this could result in the cancellation of nearly 800,000 Tessera shares and reduce its total float by almost 2%. Although it is difficult to predict the amount by which this move could boost Tessera’s stock, it is certainly likely to provide some much-needed price support in the months to come.

Spinning off non-core operations

Although no final plans have been announced, Tessera seems to want to spin off its digital imaging business within the next year or two. According to a recent report, the company’s incoming CEO received an attractive compensation package that was partially dependent on his success in executing this spin-off by the end of the first quarter of 2015. However, this may be put on the back burner after an apparent in-house scandal forced CEO Robert Young to step down earlier this year.

Immediate concerns

Meanwhile, a brewing proxy battle between dissident Tessera shareholder Starboard Value LP and the company’s current board has consumed shareholders’ immediate attention. With the support of a few other key shareholders, Starboard was urging Tessera’s rank-and-file shareholders to elect its preferred slate of candidates to Tessera’s board at the May 23 shareholder meeting.  As a result, the company elected 10 board members and six were Starboard nominees.  This likely means that big changes are coming soon for Tessera.

In sum, Tessera is attempting to emerge from a prolonged rough patch with a revamped capital allocation strategy and a potential spin-off of a non-core business. If it can continue to produce enough revenue to fund its buyback program and issue special dividends to its shareholders, it could regain its shareholders’ trust and take a leading role in the booming camera module industry.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article With an Upcoming Special Dividend and Spin-off, Is This Stock Worth Buying? originally appeared on is written by Mike Thiessen.

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