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Monday, August 07, 2006

Qimonda IPO; Not All IPO Backdoor Plays Are Equal

Stock Tickers: QI, IFX, CY, SPWR, FACT, IRBT, AMD, SPSN, RMBS

Not all backdoor plays are created equal. In the past it has paid substantially to bet on IPO spin-offs by acquiring the parent company if they will continue to benefit from unlocking shareholder value. Here are some successful examples of recent Backdoor Plays:

-Wendy's (WEN) spinning off of Time Hortons (THI)

-McDonalds (MCD) spinning off Chipotle (CMG)

-First Albany (FACT) having a decent stake in iRobot (IRBT)

-Cypress Semi (CY) spinning off SunPower (SPWR)

-Continental (CAL) having a stake in Copa Holdings SA (CPA)

So why is Infineon Technologies AG (IFX) not enjoying a run-up ahead of the spin-off of Qimonda (QI)? For starters, the street doesn't really understand the company that well to begin with and now it will maybe be even more of the same. Qimonda is the memory specialty unit of Infineon.

IFX will continue to hold about 80% of QI after the IPO, and future market conditions and the chip environment will dictate the fate of this ownership percentage. It has said it plans to reduce its stake to a minority stake. It also may be too little too late as the last 6 months available showed the company posting a 15% sales gain, but it was losing money. The company plans to increase its margins and profits by increasing its focus to DRAM products that will be produced in lower-cost regiosn of the world instead of just the current factories in Germany, Portugal, China, and the US.

So this is lacking any sizzle for new investors since that attitude appears to be "Well I can spend nothing and already own 80% of it as is, or I can throw money into a money-losing 'Me Too' chip spin-off." The street may also be using the Spansion (SPSN) spin-off from AMD (AMD) that has come back to its post-IPO lows. It had performed well, but the market is digesting a crummy chip market and a crummy market on almost everything tied to PC's. That is the real culprit here, so it is unlikely that there is going to be a sudden flurry of interest. That can change, but for now interest is lukewarm at best.

Since IFX ran substantially from $9.00 to over $12.00 in the January to May period, it has been enduring a series of rolling lower-highs on each attedmpt to recover. Now that Rambus (RMBS) is in the soup and IFX has been batting the company for years, it is possible that the situation could improve. That is still pretty small for IFX since it is so large, so this may to have to improve all on its own. The street has known this IPO of Qimonda was coming for a long time, and the chart pretty much says it all.

This IPO is expected to be 63 million shares. Proceeds for 42 million shares will be going to Qimonda and the proceeds from 21 million shares will be going to 21 million. With a $16 to $18 range, the total amount the street is set to absorb is $1.07 billion at the mid-point of the range.

Jon C. Ogg
August 7, 2006
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