Loeb's Third Point Raises Stake in Cypress Semi (CY) to 5.1%, Wants Undervaluation of Semi Biz Addressed Sooner

In a 13D filing on Cypress Semiconductor (NYSE: CY), Daniel Loeb's Third Point LLC disclosed a 5.1% stake (7,674,000 shares) in the company. This is up from the 750,000 share stake the firm held at the quarter ended March 31, 2007.

Loeb's firm said the the implied value of the semiconductor business has declined 15% and it is time for management and the Board to aggressively pursue various strategies that should cause the significant value of the Company's semiconductor business to be fully reflected in the price.

The firm notes that while management has committed to distributing the Company's stake in Sunpower (Nasdaq: SPWR) no later than 2009, they believe that there are tax-efficient mechanisms to do so sooner and believe that the Board should expedite its review of these mechanisms in order to implement as soon as practicable a strategy that will allow the Company's shareholders to realize the value of the semiconductor business well before 2009.

The firm belives the implied valuation of the semiconductor business is understated by at least 50%. The firm also said the implied valuation of the semiconductor business is well less than one-half of the valuation that they understand was ascribed to it during advanced LBO discussions that took place in the fall of 2006. The firm said this business has only become more valuable since.

The firm said if the undervaluation of the semiconductor business is addressed, the market price of the common stock could increase 25% from current levels.

From the Filing:

The Reporting Persons generally support the existing strategy of the Company and believe that the Company's management team and its Board of Directors (the "Board") have, since the beginning of 2006, been very effective in identifying and enhancing the value of Sunpower for the benefit of the Company's shareholders (which the Reporting Persons believe has already been reflected in the valuation of the Common Stock) and in significantly increasing the value of the Company's semiconductor business (which the Reporting Persons believe has not yet been reflected in the valuation of the Common Stock).Specifically, the Company's management has taken important steps in divesting money-losing, underperforming, non-core and commodity semiconductor units over the past 18 months and in materially reducing the physical infrastructure associated with the semiconductor business, resulting in a large and permanent reduction in capital spending requirements. The Company's management has also refocused the semiconductor business on fast-growing, value-added and higher-margin products, which the Reporting Persons believe will result in strong free cash flow generation by that business. In addition, from a corporate finance perspective, the Company has "refinanced" its convertible debt advantageously and sold Sunpower shares, allowing it to repurchase Common Stock on an opportunistic and accretive basis.

However, during this same period, as management has made these many positive strategic moves, the implied value of the semiconductor business embedded within the Common Stock market price has declined by about 15%,significantly under performing the semiconductor indices, which have risen. Given this sustained period of under performance by the "semiconductor portion" of the Common Stock, and given that further buybacks of Common Stock at current levels would not be nearly as accretive as those in the past, (as Sunpower now makes up roughly 80% of the value of the Common Stock), we believe that it is time for management and the Board to aggressively pursue various strategies that shouldcause the significant value of the Company's semiconductor business to be fully reflected in the market price of the Common Stock. While the Reporting Persons appreciate that management has committed to distributing the Company's stake in Sunpower no later than 2009, the Reporting Persons believe that there are tax-efficient mechanisms to do so sooner and believe that the Board (which the Reporting Persons understand is well aware of these issues)should expedite its review of these mechanisms in order to implement as soon as practicable a strategy that will allow the Company's shareholders to realize the value of the semiconductor business well before 2009.

The Reporting Persons intend to make themselves available to the Board to discuss in depth their views on this extremely important issue, as well as the metrics by which the Reporting Persons have concluded that the financial markets are materially undervaluing the Company's semiconductor business today. In general, the Reporting Persons observe that the implied value of the Company's semiconductor business (as measured by the total market capitalization of the Company, minus the value of the Sunpower holdings, minus the net cash position at the semiconductor business) currently stands at roughly $800 million. The Reporting Persons believe that this implied valuation understates by at least50% the fundamental value of the Company's semiconductor business, based on key metrics such as price-to-sales, price-to-earnings and free-cash flow-yield - as compared to its relevant semiconductor peers. Moreover, the Reporting Persons believe that the current implied valuation of the Company's semiconductor business is well less than one-half of the valuation the Reporting Persons understand was ascribed to it during advanced LBO discussions that took place in the fall of 2006 - and that this business has only become more valuable since.Given their belief that this valuation "disconnect" could persist until a distribution date for the Company's Sunpower holdings draws nearer, the Reporting Persons believe that the Cypress Board must expeditiously continue to follow its successful path of doing what is best for the Company's shareholders,which has already resulted in significant gains for stakeholders. Specifically,the Reporting Persons ask that the Board immediately consider all means to cause the full value of the Company's semiconductor business to be appropriately reflected in the current share price - which the Reporting Persons believe could result in an increase in the market price of the Common Stock of 25% from current levels.