On April 17, 2008, Marty Dirks contemplated the financial statements of Cypress Semiconductor
Corporation (Cypress) and SunPower Corporation (SunPower) (see Exhibit 1). Based on the expected
long-term increases in energy prices and concerns about U.S. dependence on politically unstable or
unfriendly countries for the import of oil, solar energy firms, such as SunPower, seemed to have a bright
business outlook.
That day, Cypress announced it received a favorable ruling from the IRS with respect to a potential taxfree
distribution of its SunPower common shares. This could mean that Cypress would distribute its
SunPower shares to its shareholders in a tax-free transaction. This should eliminate any tax-related
discount that investors might attribute to Cypress’ ownership of SunPower. Dirks wondered if that might
create some mispricing opportunity.
Dirks had been a long/short equity analyst or portfolio manager for many years and was now investing his
own capital. He liked to maintain his net long exposure at 20 to 30 per cent of equity, although at this time
his portfolio was 60 per cent long and 20 per cent short, with a net long exposure of 40 per cent.
CYPRESS SEMICONDUCTOR AND SUNPOWER
Cypress Semiconductor designs and manufactures programmable system-on-chip (PSoC) products,
capacitive sensing and touchscreen solutions, universal serial bus (USB) controllers, wireless USB, CyFi
low-power radio frequency, programmable clocks, buffers and other semiconductor devices.

SunPower Corporation designs and manufactures solar electric power technologies. Cypress made a
significant investment in SunPower in 2002 and in November 2004 Cypress purchased the remainder of
SunPower. In November 2005, Cypress sold approximately 13 per cent of SunPower to investors in an
initial public offering. SunPower’s stock increased 50 per cent in price the first day of trading.
While SunPower was an exciting business, the stock was highly valued, with an enterprise value to trailing
revenue multiple of more than five. SunPower’s valuation seemed appropriate and Dirks concluded that it
did not present an investment opportunity with which he was comfortable.
However, Dirks heard from industry contacts that Cypress’ business was improving substantially.
A simplified balance sheet for Cypress and SunPower is provided (see Exhibit 2).

Exhibit 1
SELECTED DETAILS FROM FINANCIAL STATEMENTS
On April 17, 2008:
Cypress Semiconductor had a closing market price of $27.37
Cypress Semiconductor had 152.71 million shares outstanding
SunPower had a closing market price of $86.80
SunPower had 84.39 million shares outstanding
Cypress owned 44.5 million shares of SunPower
Cypress consolidated revenues for the fiscal year ended December 30, 2007, in thousands:
Consumer and Computation Division $357,671
Data Communications Division 117,755
Memory and Imaging Division 330,305
SunPower 774,790
Other 15,866
--------------------------------------------------------------------------------------
Total revenues $1,596,387
Cypress revenues excluding SunPower = 1,596 – 774 = $822 million
Source: 10-K filings, Yahoo! Finance.
Page 4 9B09N016
Exhibit 2
SIMPLIFIED BALANCE SHEET
Cypress
Semiconductor SunPower
Cypress net of
SunPower
Consolidated Balance
Sheet Items
December 30,
2007
December 30,
2007
December 30,
2007
(In thousands) (In thousands) (In thousands)
Assets
Cash and
equivalents 1,426,405 390,667 1,035,738
Other assets 2,299,544 1,263,071 1,036,473
Total Assets $ 3,725,949 $ 1,653,738 $ 2,072,211
Liabilities and
Stockholders’ Equity
Convertible debt 1,025,000 425,000 600,000
Other liabilities 602,117 364,648 237,469
Total liabilities 1,627,117 789,648 837,469
Minority interest 378,400 378,400
Total stockholders’
equity 1,720,432 864,090 856,342
Total Liabilities and
Stockholders’ Equity $ 3,725,949 $ 1,653,738 $ 2,072,211
Consolidated
Statements of
Operations
Revenues $ 1,596,387 $ 774,790 $ 821,597
CY/SPWR Questions:
A) What is the market value of equity for Cypress (CY)?
B) What is the market value of SunPower (SPWR) owned by CY?
C) What is the market value of equity for CY excluding the SPWR business implied by
the current market prices?
D) What is the Enterprise Value implied by the current market prices for CY excluding
the SPWR business?
E) What value do the current market prices assign to each dollar of revenue for CY’s
business? (i.e. what is the revenue multiple for CY excluding the value of SPWR?)
F) You determine from your research of comparable businesses and CY’s historical
valuation ranges that CY alone should be valued at 1.5 times its revenues. What stock
price would that imply for CY? (This is the price CY stock actually “should” trade at in
the market. This price would include the value of SPWR in the price of CY. Assume
that SPWR’s stock price does not change in value.)
G) Do you see an investment opportunity here? If so, what?
H) What circumstances could create an opportunity in a situation like this? Why could
such an opportunity exist in what some academics say is a highly efficient market?
I) If you decided you wanted to own CY’s operating business, but not SPWR, how would
you implement this in a portfolio? (i.e. how many shares of each company might you
buy or sell if you wanted to have the position?)
J) What are the issues to keep in mind when taking a position such as this? What could
go wrong?
K) If you were an analyst at a hedge fund, what would you say to your portfolio manager
if she asked you to evaluate this position? (Should you take a position? If so, how
large? Etc. What exactly would you say to her?)
L) If your fund has $100 million in total assets under management, what size position
would you recommend?
M) Consider how this paired position fits with the rest of the portfolio. Would you expect
the pair’s profit or loss to be correlated with the market?
N) Consider what would happen if Cypress did a stock spinoff/dividend of SunPower
shares as a Class B stock which was not identical to the currently trading stock. The
currently trading SunPower Class A stock would have less voting rights, but would be
otherwise identical to the Class B stock spun out from Cypress.
From a valuation point of view only, how should the Class A and Class B stock prices
differ?
From a market trading point of view only, how might the Class A and Class B stock
prices differ? (Think of who owns what and how they would behave after a spinoff.)
Considering both valuation and trading behavior factors, how would you predict
SunPower Class A and Class B stock prices will differ after a spinoff? Why?