Value Find: ESS Technology, Inc.

After pressure last year from activist investors, this beaten-down microcap technology company is finally showing signs of getting its act together.

Last May, investment firm Riley Investment Management publicly expressed its displeasure with the financial performance of long-struggling, fabless semiconductor firm ESS Technology, Inc. (Nasdaq: ESST). ESS designs and markets high-performance, digital video processors for the consumer electronics market. As of last June, Riley had amassed a nearly 7% stake in ESS and demanded that the money-losing Fremont, Calif.-based company shut down its remaining chip operations, sell its investment and real estate assets, and return all proceeds to shareholders. At the time, the activist investor had estimated that ESS could be worth over $2.50 a share under a liquidation scenario, although the estimate didn’t seem to include shutdown expenses.

ESS responded to the pressure from Riley and Loeb Partners, another major shareholder, by disclosing that it had formed a special committee in April 2007 to consider strategic alternatives, including a potential liquidation. ESS also reminded shareholders that, since November 2006, it had sold its advanced BlueRay/HD-DVD technology for $13.5 million, licensed its standard definition DVD products for $2 million plus future royalties and had closed its unprofitable camera phone division. This response didn’t satisfy Riley and, in mid-July of last year, it nominated four Riley representatives for election to ESS’s board of directors at its next annual meeting. Less than a month later, ESS co-founder Fred Chan resigned as ESS’s chairman.
 
Fast forwarding to this past fall, ESS, with a $44 million market capitalization, announced in late October that it had signed an agreement to sell its real estate for $26.3 million in cash. Then, at the end of November, ESS quietly disclosed in an 8-K filing that the deal had fallen through and that it was attempting to renegotiate the price. Around this same time, Riley disclosed that it had begun to reduce its stake in ESS. The combination of Riley’s seemingly reduced interest in the stock, combined with the botched real estate deal, clearly weighed on the stock. After trading over the $1.60 a share level at the start of November, ESS ended 2007 at the $1.33 level. So far, it has been more of the same for ESS, with the stock fetching just $1.20 at Monday’s close.

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