Chapman Capital Recommends Reorganization of Cypress Semiconductor Corporation

LOS ANGELES, Dec. 29 /PRNewswire/ -- Chapman Capital L.L.C. today announced that it has notified the Board of Directors of Cypress Semiconductor Corporation of its recommendation that Cypress reorganize via a split-off and subsequent going-private LBO transaction. A letter dated today from Robert L. Chapman, Jr., Managing Member of Chapman Capital, has been sent to Cypress's full Board of Directors and is attached hereto.

Mr. Chapman commented, "Like other significant owners of Cypress Semiconductor, Chapman Capital has recommended that its Board of Directors re-engage Credit Suisse to effect a corporate reorganization that separates Cypress's core semiconductor operations from its controlling stake in SunPower Corporation." Regarding Chapman Capital's growing concerns regarding relatively immaterial Cypress share ownership by its Board of Directors, Mr. Chapman stated further, "Cypress's core semiconductor business, which Mr. Rodgers founded nearly 25 years ago, deserves a much higher valuation than what it was ascribed the day Mr. Rodgers took it public two decades ago. Mr. Rodgers has stated publicly, 'you and I are going to make as much money as fast as we can on this.' Cypress's Board of Directors, despite their insignificant percentage ownership of Cypress, should expect that we are going to hold Mr. Rodgers to this promise."

Chapman Capital L.L.C. is a Los Angeles, CA based investment advisor focusing on takeover and turnaround investing. The firm currently manages over $300 million as the registered investment advisor to Chap-Cap Partners II Master Fund, Ltd. and Chap-Cap Activist Partners Master Fund, Ltd., the combined owners of approximately 1% of Cypress Semiconductor Corporation's common shares. Over the past ten years, Chapman Capital has agitated successfully for the restructuring or sale of over twenty publicly-traded companies. Mr. Chapman previously was employed by Goldman Sachs & Co., Scudder Stephens, & Clark, and NatWest Bank USA. Related news releases, as well as additional information on Chapman Capital, may be found at http://www.chapmancapital.com/.

Cypress Semiconductor Corporation designs, develops, manufactures, and markets a line of digital and mixed-signal integrated circuits. The Company's circuits are used in consumer, computation, data communications, automotive, industrial, and solar markets. Leveraging proprietary silicon processes, Cypress's product portfolio includes a broad selection of wired and wireless USB devices, CMOS image sensors, timing solutions, specialty memories, high-bandwidth synchronous and micropower memory products, optical solutions and reconfigurable mixed-signal arrays. Related news releases, as well as additional information on Cypress Semiconductor, may be found at http://www.cypress.com/.

Robert L. Chapman, Jr. Managing Member December 28, 2006 Mr. Thurman J. Rodgers CEO, President (58; <1% owner(1)) Cypress Semiconductor Corporation (1982) 3901 North First Street San Jose, CA 95134 Phone #1: (408) 943-2611 Phone #2: (650) 839-0251 Director, SunPower Corporation Director, Ion America Corporation Fmr. Director, Solarflare Communications, Inc. Fmr. Director, Infinera E-Mail: tjr@cypress.com Mr. Eric A. Benhamou (50; 1982) Chairman, Cypress (~ 0% owner(2)) Ch./CEO, Benhamou Global Vent.(5) 540 Cowper Street, Suite 200 Palo Alto, CA 94301 Phone #: (650) 324-3680 (Ext. 2) Chairman, 3Com Corporation Chairman, Palm, Inc. Director, RealNetworks, Inc. Director, Silicon Valley Bank E-Mail: eric@BenhamouGlobalVentures.com Mr. J. Daniel McCranie (62; 2005) Director, Cypress (~ 0 % owner(3)) 1750 Vista del Sur Gilroy, CA 95020 Chairman/ Fmr. CFO, Virage Logic Chairman, ON Semiconductor Corp. Director, Actel Corporation Phone #1: (408) 848-3223 Phone #2: (408) 930-2048 E-Mail: dan@mccranie.biz Mr. James R. Long (63; 2000) Director, Cypress (~ 0% owner(4)) 2348 S. Ocean Blvd. Highland Beach, FL 33487 Phone #: (561) 278-6036 Fmr. EVP, Nortel Networks Corp.(6) Director, 3Com Corporation Fmr. Dir., Symon Communications(7) E-Mail: jrlong42@yahoo.com Mr. Lloyd A. Carney (44; 2005) Director, Cypress (~ 0% owner(8)) Gen. Mgr., IBM's Netcool Division 68 Shearer Drive Atherton, CA 94027-3957 Phone #1: (415) 568-9900 Phone #2: (650) 333-4995 Fmr. Ch./CEO, Micromuse Inc. Fmr. COO, Juniper Networks, Inc. Fmr. President, Nortel Core IP Div. Fmr. Pres., Nortel Enter. Data Div. Fmr. Pres., Nortel Wireless Internet E-Mail: lloyd@carneyglobalventures.com Mr. W. Steve Albrecht (59; 2003) Director, Cypress (~ 0% owner(9)) Associate Dean, Brigham Young U.(11) 361 W. 310 North Orem, UT 84057 Phone #: (801) 422-3154 Director, Red Hat, Inc. Director, SkyWest, Inc. Director, SunPower Corporation Director, ICON Health & Fitness Inc. Fmr. Professor, Stanford University Fmr. Accountant, Deloitte & Touche E-Mail: steve_albrecht@byu.edu Mr. Evert P.van de Ven (56; 2005) Director, Cypress (~ 0% owner(10) 3411 Via Monteverde Encinitas, CA 92024 Phone #: (858) 759-2218 Fmr. EVP/CFO, Novellus Systems Fmr. Dir., Matrix Integrated Sys. E-Mail: TBD Via U.S. Postal Service & United Parcel Service Dear Mr. Rodgers: Chap-Cap Partners II and Chap-Cap Activist Partners (the "Chapman Funds"), advised by Chapman Capital L.L.C., own 1.5 million common shares, or just over 1%, of Cypress Semiconductor Corporation ("Cypress", the "Company"). According to Mr. Rodgers's own definition, this investment makes the Chapman Funds collectively "a real big Cypress Shareholder."(12) To put this ownership stake into perspective, the Chapman Funds' financial interest in Cypress's common equity now appears to exceed Mr. Rodgers's own,(13) despite his having founded Cypress and received millions of free stock option grants over the past two and one half decades. Even more disparate is the spread between our ownership and that of the balance of Cypress's Board of Directors ("the Board"), which owns virtually no common stock following either a) director resignations or b) exercise-and-sell treatment of free stock option grants. Despite this asymmetry, it is our sincere intention for this initial communication with Mr. Rodgers and the balance of the Board to be considered amicable and productive, rather than opprobrious or contumelious.(14) Hopefully, this letter will serve as the first in a steady thread of constructive communications that cure the needlessly protracted undervaluation placed by the market on Cypress's core semiconductor operations ("Cypress Core"). Despite Cypress's senior management making numerous appearances at Wall Street investment conferences this past year, investors appear unwilling to believe that Mr. Rodgers finally is going to deliver long term, permanent shareholder value for the Cypress Core business that Mr. Rodgers founded in 1982. With the exception of Cypress CFO Brad Buss's jocular intimations that certain Cypress shareholders' speculation is what led to the Cypress Core LBO discussions being terminated, Cypress's consistent message of "we have changed" should have resonated by this time with Wall Street as a whole. The reasons underlying Wall Street's apparent refusal to believe that T.J. Rodgers can deliver on these promises are a mystery. This is the same T.J. Rodgers who two decades ago, before Cypress's stock had underperformed the S&P 400 Semiconductor Index by 200 percentage points over the last dozen years,(15) became a "high-tech celebrity because of Cypress's early growth and, in part, because of his high-profile criticism of what he termed wasteful government subsidies sought by other chip makers."(16) Because Mr. Rodgers may be viewed as this sort of "rabble-rouser" who operated as such on Cypress's behalf back when I was just graduating from his alma mater's sworn rival, I am confident Mr. Rodgers will not behave hypocritically by objecting to Chapman Capital's public expression of its opinion regarding Cypress and his management thereof. At the outset, please let me congratulate and commend Mr. Rodgers for spearheading Cypress's extraordinarily profitable and fortunately-timed acquisition of SunPower Corporation (Nasdaq: SPWR; "SunPower"). As many times as I have heard investors dismiss Mr. Rodgers's foresight, I struggle to repose confidence in those who credit pure, random luck (rather than his perspicacity), his hearty appetite, and his shared taste with SunPower Corporation founder Dick Swanson for a certain Silicon Valley coffee shop(17,18) for the SunPower masterstroke. When Mr. Swanson told T.J. Rodgers that SunPower was two weeks away from laying-off half of its employees, Mr. Rodgers didn't hesitate, reportedly cutting Swanson a $750,000 check "on the spot to keep the company afloat until [Rodgers] could convince the Cypress Board to acquire SunPower."(19) In the end, Mr. Rodgers's pulling out his checkbook in December 2001 (reportedly without doing material due diligence) to save his college buddy's company from insolvency, while seemingly making the Nostradamus-like prediction that oil prices were on the cusp of skyrocketing from $18/barrel to $60/barrel(20), is what gave Cypress pole position on future rounds of SPWR pre-IPO financing. Yet, after listening to Mr. Rodgers prosthetize audiences on SunPower's virtues, some have concluded that Mr. Rodgers may have an overriding desire for his highly successful Silicon Valley peers to consider his fortunate foray into solar cells (vs. SRAM chips) as his true business legacy. In line with this theory, it has been argued that Mr. Rodgers refuses to separate SunPower from Cypress Core because such reorganization could remove from Cypress the only growth vehicle capable of vindicating his career oversight of Cypress, once and for all, as Mr. Rodgers moves into the late stages of his forty year career. The fact of the matter, however, is that no matter how hard Mr. Rodgers may try to associate himself with Wall Street's latest investment-theme-of-the-day,(21) the name "T.J. Rodgers" will be synonymous with Cypress Semiconductor for decades to come. It is our understanding that this past fall, Cypress engaged Credit Suisse to represent Cypress in LBO discussions that valued Cypress Core at $1.8 - $2.0 billion, supported by $175-200 million in estimated 2007 EBITDA.(22) After subtracting the market value of the shares of SunPower owned by Cypress from that of Cypress' consolidated market capitalization, this $1.8 - 2.0 billion valuation appears to place a Cypress Core valuation at over $12.00 per Cypress share,(23) for a total Cypress valuation over $22/share. This compares to the current value of Cypress Core and Cypress at $5.50 - $6.00 (a 50% discount) and $16.00 per Cypress share respectively. With the exception of the momentary and speculative inflation of Cypress Core's embedded market value to nearly $12.00 per Cypress share in October 2006, Cypress Core's market value has not moved materially or in a sustained manner above $7.00 per Cypress share since the November 2005 IPO by Credit Suisse and Lehman Brothers of SunPower at $18.00/SPWR share. In fact, one could argue that after taking into account Cypress's existing cash balances,(24) Cypress Core now trades at virtually the same valuation as the day Morgan Stanley took the Company public some twenty years ago.(25) This same investment bank, which gushed with praise for Mr. Rodgers and Cypress Core at the time of Cypress's IPO, now has refused to recommend Mr. Rodgers's stock for over five years(26) and has a top-rated analyst who recently portrayed his views in the "confidence lower" category.(27) Chapman Capital's investment in Cypress has not been made with short-term fundamentals or immediate strategic plans in mind. To Mr. Rodgers's stated satisfaction, we are "investors and not speculators associated with Cypress."(28) Our long term investment in Cypress was made following passive participation in over a dozen recent conference calls and presentations, on top of countless inquiries to semiconductor and solar cell industry experts. In fact, it is our view that Cypress may be experiencing a slight, short-term order shortfall in line with others in its industry, a condition with which we are comfortable given our long term perspective. However, something with which we are not so comfortable is market concerns that T.J. Rodgers may have fallen in love with SunPower as a source not only of revenue growth but reputation redemption following a history of false starts. Mr. Rodgers' emotional tie to SunPower shined brightly when he beamed in May 2005, "For the first time in my life, I actually make something that people care about!"(29) Indeed, Chapman Capital has heard Mr. Rodgers' well rehearsed defense for keeping SunPower from flying away from the nurturing nest of Cypress, but finds certain arguments somewhat self-serving. While we present no argument to the claims that the SunPower "asset is growing like a rocket," is "now making 20%," and has "got the best stuff in town ... ,"(30) there are five gaping holes in Mr. Rodgers's logic that appear to be in need of being addressed as follows: T.J. Rodgers Non-Separation Excuse #1: The tax situation underlying the separation of SunPower from Cypress is too complex; it is better to wait until 2009 when it is easy. Cypress Owner Rebuttal #1: An October 24, 2006, "Accounting & Tax Policy" report by accredited tax expert Robert Willens of Lehman Brothers expounded on several avenues that could be utilized by Cypress to accomplish a tax-effective separation well before 2009. While the Code(31) seems to restrict the simple, tax-free spin-off of an acquired corporation (SunPower) anytime before the five year anniversary of Cypress's "taxable acquisition of control," Lehman Brothers succinctly describes a feasible scenario wherein CY could "create a new corporation (Newco) to which it would contribute the stock of SPWR and the asset of a small business that CY has actively conducted throughout the [preceding] five years." Lehman Brothers concluded, "there is reason to believe that the 'Newco strategy' could allow CY to overcome the fact that control of SPWR was acquired as far as the active business test goes, in a 'tainted' manner." In addition, we believe that Mr. Rodgers has reviewed a separate academic study supporting the feasibility of Mr. Willens's tax strategy. Alternatively, it has been discussed widely that Cypress, perhaps with the assistance of Mr. Rodgers's friends at Silver Lake Partners, could utilize Code Sec. 355(a)(1)(A) to formulate a plan of separation akin to the highly profitable Seagate/Veritas transaction announced on March 29, 2000.(32) The fact that it may be "easier" to sit and wait vs. tackling a shareholder maximizing project (as did the management of Seagate six years ago) is not an excuse acceptable to Cypress's long suffering shareholders. T.J. Rodgers Non-Separation Excuse #2: Spinning off SunPower would be like selling off a controlling interest in Intel in early 1972. SunPower is extremely valuable and Cypress should make sure that the Cypress shareholders get the benefit of it.(33) Cypress, which created enormous value with SunPower, gets nothing from a spin-off. Cypress Owner Rebuttal #2: Chapman Capital does not believe that the highly educated CEO of a $2.3 billion public company lacks a basic understanding of portfolio theory. It seems impossible to me that Mr. Rodgers does not understand that the spun or split off shares of SunPower would end up in the portfolios of the same Cypress shareholders who own(ed) (indirectly) these shares before such spin/split off. Chapman Capital and the dozens of long term Cypress shareholders have not demanded that Mr. Rodgers "monetize [emphasis added] at the current point the exceptional $2 billion plus value SunPower has."(34) Post spin/split off, should SunPower prove to be a 100 bagger as has been Intel since the year after its October 1971 IPO,(35) today's Cypress shareholders who decide, on their own volition, to keep spun/split-off SunPower shares for the next 34 years will "get the benefit of it." Contrary to Mr. Rodgers's protests, by spinning/splitting off SunPower from Cypress, he would not be "tak[ing] a precipitous action to terminate Cypress ownership in [SunPower] ... "(36) because, once again, the very same Cypress shareholders who indirectly owned SunPower (via their Cypress shareholdings) still would own, post spin/split, "a chunk of an extremely important company,"(37) in addition to a stake in the smaller "new" Cypress. In fact, such a spin/split off would solve perfectly the very dilemma cited by T.J. Rodgers himself -- "We're just not passing ... strategic value [in SunPower] to investors."(38) Spinning/splitting off Cypress's ownership of SunPower to Cypress's owners does nothing but "pass it to investors." T.J. Rodgers Non-Separation Excuse #3: There would be lawsuits thrown at Cypress and SunPower if they were to attempt a separation. Cypress Owner Rebuttal #3: First and foremost, despite the perfunctory litigation that attends nearly every major financial transaction involving a public company,(39) successful split offs have been accomplished of Chipolte Mexican Grill, Inc. from McDonald's Corporation, Hughes Electronics tracking shares from General Motors Corporation, Blockbuster Inc. from Viacom Inc., and proximately Liberty Media Corporation from News Corporation (though a bit different with only one shareholder, Liberty, participating). Should it be required, a shareholder vote, like those used regularly in corporate reorganizations, would cripple any prospective legal complaints by "minority shareholders." Moreover, Cypress Semiconductor is no stranger to litigation, with T.J. Rodgers himself reportedly a most worthy opponent when defending spurious claims against him or "his" company.(40) In reality, if fear of litigation were an impediment in today's business world, a catatonic, transaction-free state would be the end result, which it is not. Mr. Rodgers simply needs to pick up his phone, call Cypress's outside counselor Larry Sonsini, and tell him to "just get it done," as I suspect Mr. Rodgers has done countless times in the past. T.J. Rodgers Non-Separation Excuse #4: Cypress provides SunPower with expertise in the areas of management,(41) engineering, manufacturing and facilities(42) that is instrumental to SunPower's growth and success. Cypress Owner Rebuttal #4: If there is such enormous intellectual value being transferred from Cypress to SunPower, from which Cypress shareholders are deriving gain via a higher price of SPWR shares in the market, there is no reason why a separated Cypress and SunPower cannot be served by a new, related legal entity employing these highly talented individuals and compensated (to cover their salaries) by each of Cypress and SunPower. Each of the individuals who currently serve both Cypress and SunPower would continue to do so in exactly the same fashion as before, with the only difference being the name of the new legal entity on their paycheck. The same talented Cypress employees would drive to the same work locations, work the same hours, and accomplish the same professional goals as they have for years. Mr. Rodgers still could "get automated processing in the back end of SunPower," "work with them on improving their manufacturing, reducing the number of steps, reducing their cycle time, all the stuff Cypress knows how to do."(43) If this third party entity concept seems too complicated, Cypress can negotiate an arms-length agreement(44) to provide all services mentioned above at a fair market rate. Simply stated, co-ownership is neither required nor potentially advisable given the potential conflict of interest wherein SunPower, only 65% owned by Cypress, is favored over the latter. To argue otherwise would be akin to arguing against the very wafer fabrication outsourcing model that Cypress increasingly has embraced.(45) Cypress clearly sees the benefit of Grace Semiconductor, using its own wafer management, engineering and manufacturing expertise, serving a variety of clients and being compensated therefore.(46) In summary, Cypress "can create value faster inside of SunPower"(47) using the same automation team, same engineers and financiers just as it has before a split off. To think otherwise gives far too little credit to both Cypress's lawyers and those SunPower employees who have learned at the feet of a master like T.J. Rodgers. T.J. Rodgers Non-Separation Excuse #5: Cypress Core, having embraced "No more Moore," is on the cusp of significant revenue and margin expansion, making an LBO thereof a poorly-timed for current Cypress shareholders. Cypress Owner Rebuttal #5: Every week, private equity firms are paying enormous premiums to capture these very operational improvements of public companies like Cypress. When taking into account Cypress's net cash (assuming full conversion of its convertible bonds), Cypress Core trades at an enterprise valuation less than one times highly profitable revenues despite a) the comparables(48) trading at nearly two times revenues and b) Cypress's potential for "hockey stick" free cash flow in 2007 and beyond. Ignoring the value of a Net Operating Loss (NOL) carry forward valued at approximately $0.30-0.50/Cypress share (10-15% of each NOL dollar/share), Cypress Core trades for under 10 times its 2007 projected EPS (vs. comparables at over 15 times). Cypress has made no secret of in-process operational and financial improvements, with CFO Brad Buss having gotten wired his "this is not your father's Cypress" speech after numerous conference appearances this year. Few investors remain who have not heard about Cypress soon owning a stabilized, steady-profit SRAM business following Samsung and Toshiba EoL'ing competitive products, how Cypress's R&D department is becoming a profit (vs. cost) center, or how Brad Buss himself was able to design a usable product with Cypress's innovative new PSoC software. However, given Cypress's long history of setbacks under certain top officer(s),(49) Wall Street public equity, lacking the ability to take control of Cypress Core's management, appears unwilling to give Cypress the credit that private equity reportedly was able and willing to provide just a few months back. Just as the CEO's of Freescale Semiconductor, Inc., Agere Systems Inc., and Phillips Semiconductor have orchestrated this past year, in exchange for Cypress control and these synergies, Cypress can obtain a healthy premium from, and transfer the execution risk to, a private equity firm with billons of investor capital burning a hole in its pocket. While Cypress' cooperative efforts with subsidiary SunPower indisputably have been accretive to both companies' shareholders, nobody should be more aware of the risks of pressing one's luck than T.J. Rodgers. By the end of the dot-com boom year of 2000, Cypress found itself at a nearly $1.5 billion annual revenue run rate,(50) down streaming into nearly $3.00 in annualized EPS. On November 30, 2000, with Cypress shares trading just under $25/share, Mr. Rodgers announced a $125 million share repurchase program,(51) citing "undervaluation as the reason for the buy-back."(52) On this date, Mr. Rodgers exuded confidence in Cypress's future, stating, "Demand is robust, but they're just slowing down a little bit. They're using inventory rather than buying new products."(53) Yet, exemplifying the difficulty in forecasting the perpetuation of a healthy environment for semiconductors, within a mere nine months Cypress's revenue run rate had fallen by over 50%,(54) with Cypress's "undervalued" stock having fallen by nearly 50%(55) as well. The "undervaluation" of Cypress's shares did not end there, with its common stock just one year later having fallen another 75% to $3.60/share,(56) a price some 20% below Cypress' 1986 IPO price of $4.50/share. Clearly, the $110 million investment made into SunPower at around this same time was a far more astute investment than this one announced in November 2000. Needless to say, given the salubrious environment for private equity capital and relatively healthy state of the Cypress Core business, there is a strong argument to be made that striking while the iron is hot is readily applicable to a Cypress Core LBO. While cyclical semiconductor risk is no stranger of Mr. Rodgers, the technological risk accompanying Cypress's SunPower investment may be worthy of further study by Cypress's Board. Last month, First Solar, Inc., a Phoenix, AZ based designer and manufacturer of solar modules with estimated 2006 net sales of $125 million,(57) came public in an IPO led by Mr. Rodgers's friends at Credit Suisse and Morgan Stanley & Co. Valued at over $1.5 billion at its IPO price of $20/share, FSLR's technology is viewed as a potential "game changer"(58) in the global solar power industry. FSLR currently(59) produces solar cells with approximately half the energy conversion efficiency as those photovoltaic cells manufactured by SunPower (reportedly lab tested as high as 28%; commercially now at 22%). However, FSLR's Cadmium Telluride cells generate power at a cost/watt that is substantially lower at approximately $1.40(60) vs. SPWR (using Crystalline Silicon) at $2.25-2.50/watt.(61) For the time being, SPWR's higher efficiency ratio allows it to target customers limited by smaller surface areas (e.g., a home's roof), while a commercial solar power generation customer (e.g., a warehouse) may be more likely to use a FSLR solution. However, this lead by SPWR in efficiency has a reasonable probability of eroding over time, given SPWR's potential scientific maximum of approximately 30% efficiency vs. 15-16% for FLSR. It has been argued that as soon as FSLR can generate 13-14% efficiency,(62) it should be in a strong position to take share from SPWR in the residential marketplace. Thus, no matter how accretive SunPower's recent PowerLight Corporation acquisition may be, it may not be prudent to consider permanent the current ebullience surrounding alternative energy that has given SPWR a 40+ price earnings ratio on 2007 earnings estimates. Another alternative energy play once in high favor on Wall Street, Evergreen Solar, Inc., now finds itself trading more than 50% below its market value of just nine months ago, yet still trades at over five times projected 2006 sales and over 50 x estimated 2008 earnings per share. As we all have learned the hard way on Wall Street, it appears that there really is nothing new under the sun. Once again, T.J., the SunPower iron is hot, and is best used in that state before it grows cold. A split-off of Cypress's SunPower shares ("buy[ing] back Cypress shares swapped for SunPower shares"(63)) would a) capitalize on SunPower's potentially fleeting relative valuation, b) put SunPower shares into the hands of today's Cypress shareholders who indirectly (via CY share ownership) "own" SunPower today (refuting Mr. Rodgers's "we'd be giving away/selling SunPower in Inning 2" argument), and c) "dramatically increase the earnings per share" of the residual/reorganized Cypress Core due to "dramatically declining the number of Cypress shares in the market."(64) I must emphasize that when Cypress's investment bankers at Credit Suisse walked Mr. Rodgers (and his eminent CFO Brad Buss) through the math underlying this transaction in October,(65) the relative valuation between what would be Cypress's selling currency (SPWR stock) and acquired one (CY stock) was far less attractive than it is today.(66) Specifically, in a split-off/swap transaction, today each share of SunPower has the purchasing power to buy approximately 30% more shares(67) of Cypress than one SPWR share could at the time Cypress's Board rejected such a transaction's feasibility. Chapman Capital, on behalf of what it believes is a significant percentage of Cypress's owners, strongly recommends that the Company re-engage its investment advisors to utilize of one the Lehman solutions to reorganizing Cypress Semiconductor. Mr. Rodgers has acknowledged publicly that the "extraordinary value of SunPower is not showing up in our shares."(68) Sure, regarding the reorganization alternatives, "they're all complicated ... they've all got legal impacts of hair hanging all over them,"(69) but Cypress has "spen[t] a quarter doing it," "ha[s] a complete update right now", is "now at the speed and understanding it ... [and] can look at it real time."(70) Cypress's investment bankers at Credit Suisse have "do[ne] the math"(71) showing Mr. Rodgers how Cypress's EPS potentially would double via a split-off of SunPower, should Mr. Rodgers decide to maximize long term shareholder value. Lehman Brothers has provided Cypress with a tax roadmap to accomplish this goal, should Mr. Rodgers decide to maximize long term shareholder value. Cypress's outside counsel at Wilson Sonsini Goodrich & Rosati has defined the legal hurdles that his partners and associates have been trained to jump, should Mr. Rodgers decide to maximize long term shareholder value. Silicon Valley legend and Cypress Chairman Eric Benhamou surely has described to Mr. Rodgers how 3Com maximized long term shareholder value by spinning off its stake in Palm, Inc. into strong year 2000 market sentiment for anything wireless. Via a SunPower split-off, Cypress shareholders can get an initial premium capital gain; thereafter, the reorganized Cypress can go private at yet another premium valuation. Once again, this is all subject to Mr. Rodgers deciding to maximize long term shareholder value. In conclusion, although Chapman Capital appreciates that Mr. Rodgers may consider SunPower "his baby," the DNA trail of Cypress's 65%(72) ownership stake leads back to the other 99% of Cypress's shareholder base, and not to that 1% "real big Cypress shareholder" T.J. Rodgers. On October 19, 2006, Mr. Rodgers stated publicly he "couldn't imagine things changing in a quarter that would cause the analysis [he'd] done to change in a quarter."(73) Well, Mr. Rodgers, things changed in a quarter, with Cypress Core's valuation dropping by 50% to its $5.50-$6.00 value today. On October 19, 2006, Mr. Rodgers stated, "Cypress can go up or down"(74); Cypress did in fact go down.(75) On October 19, 2006, Mr. Rodgers stated, "The relative values of the two can go up or down"(76); SunPower's relative value did in fact go up.(77) If Mr. Rodgers's prediction proves accurate that "in a year time frame ... SunPower will be a lot bigger, worth a lot more,"(78) then the Cypress shareholders to whom SunPower's "strategic value" shall have been "passed" (via a spin/split-off) will benefit directly (vs. under the status quo), with no risk of SunPower's value failing to be reflected. Should Mr. Rodgers desire to attach his own legacy to Dick Swanson's dream, then instead of the recommended split-off, then Cypress's Board should negotiate the going private of Cypress Core without Mr. Rodgers's participation, allowing Mr. Rodgers to continue to apply his much heralded PhD and decades of manufacturing expertise with Messrs. Werner and. Swanson. Cypress Core, the business Mr. Rodgers founded nearly 25 years ago, deserves a much higher valuation than what it was ascribed the day Mr. Rodgers took it public two decades ago. Mr. Rodgers has stated publicly, "you and I are going to make as much money as fast as we can on this."(79) He should expect we are going to hold him to this promise. Sincerely, /s/ Robert L. Chapman, Jr. Robert L. Chapman, Jr. (1) Thurman J. Rodgers ownership stake: 1,411,652 shares per Cypress 2006 Proxy Statement dated March 30, 2006; total Cypress outstanding share count was 143,900,672 as of November 1, 2006, per Cypress Form 10-Q dated October 1, 2006. (2) Eric A. Benhamou ownership stake: zero shares per Cypress 2006 Proxy Statement. (3) J. Daniel McCranie ownership stake: 1,239 shares per Cypress 2006 Proxy Statement. (4) James R. Long ownership stake: 4,300 shares per Cypress 2006 Proxy Statement. (5) Benhamou Global Ventures (BGV): http://web.benhamouglobalventures.com/. (6) In a December 8, 1999, Globe and Mail article entitled, "Nortel Insiders cashed in during stock's recent surge; Selloff came as firm's head prepared to lobby for tax cuts on options," Mr. Long was highlighted as having made "a $18.6 million profit from the exercise of options and the sale of a total of 346,176 shares worth $21.2 million" as president of Nortel's Enterprise Solutions unit, before being replaced by Bill Conner (17 years his junior) in December 1999. (7) Symon Communications Incorporated: http://www.symon.com/ (8) Lloyd Carney ownership stake: zero shares per Cypress 2006 Proxy Statement. (9) W. Steve Albrecht ownership stake: 16,000 shares per Cypress 2006 Proxy Statement. (10) Evert van de Ven ownership stake: 6,000 shares per Cypress 2006 Proxy Statement. (11) W. Steve Albrecht: http://marriottschool.byu.edu/deans/#albrecht. (12) Source: Cypress 3Q2006 earnings conference call on October 19, 2006; Mr. Rodgers, owning less Cypress shares than the Chapman Funds, referred to himself as "a real big Cypress shareholder." (13) Source: Cypress 2006 Proxy Statement dated March 30, 2006; Form 4 filed with S.E.C. on October 31, 2006, shows Mr. Rodgers having exercised 300,000 free stock options on October 27, 2006, at a 35% discount to Cypress' closing price on that date. (14) See New York Times, DealBook, "Writer Wanted at Chapman Capital"; http://dealbook.blogs.nytimes.com/category/hedge-funds/ (15) Since December 1994, the S&P 400 Semiconductor Index has appreciated over 250% while Cypress less-than-treasury bill compounded return of just over 50%, including all dividends reinvested; Source: Bloomberg Comparative Returns (COMP). (16) Source: Wall Street Journal, May 19, 2006, "Cypress Cashes in with Solar Chips." (17) Source: "The Daily Deal, "Will SunPower's Cameo Boost Its IPO,"

May 8, 2005; http://techconfidential.thedealblogs.com/2005/05/will_sunpowers_cameo_boost_it s.php

(18) T.J. Rodgers' initial $750,000 investment in SunPower Corporation has been reported to be the product of Mr. Rodgers' serendipitous decision to eat at a Silicon Valley coffee shop, coincidentally being patronized by SunPower founder and Rodger's Stanford University classmate Richard Swanson, who confessed SunPower's need for rescue financing at that time; arguably, had Mr. Rodgers not been hungry or been out of town at that particular hour, Cypress's eventual $110 million investment never may have been made. The Wall Street Journal qualified this meeting as Mr. Rodgers' having "chanced to meet a classmate from Stanford University." (19) Source: "The Daily Deal, "Will SunPower's Cameo Boost Its IPO," May 8, 2005. (20) Chapman Capital also dismisses the theory that Mr. Rodgers also owes his good luck in SunPower to 1.5 billion Chinese natives for driving up the price of oil more than threefold in as many years. (21) Wall Street has brought public two solar power generation companies in the last month alone. (22) Chapman Capital is assuming 7-8% operating margin for 2007, though CFO Brad Buss has spoken of the potential for 10% on the back of a more proprietary product mix from PSoC, programmable clocks, the USB/Westbridge handset line, and others. (23) Cypress Core = (Cypress Semiconductor[CY] - (~ 0.29 * SunPower[SPWR])). (24) Net cash balance assumes Cypress's $600 million, in-the-money 1-1/4% bonds convertible at $12.69/share are in fact converted before the June 15, 2008, deadline; each $1,000 face value bond converts into 55.172 shares plus $300 in cash or stock. (25) Cypress went public in May 1986 at split adjusted $4.50/share, raising over $65 million via lead manager Morgan Stanley & Co. (26) Morgan Stanley semiconductor analyst Mark Edelstone last recommended Cypress shares in April 2001 with an "Outperform" rating. (27) Source: Morgan Stanley reported dated October 19, 2006, entitled, "Cypress Semiconductor: No Change to EPS but Confidence Lower." (28) During Cypress's 3Q2006 earnings conference call, in response to a question regarding outstanding strategic alternatives from Merrill Lynch analyst Srini Pajjuri, T.J. Rodgers commented, "We're interested in investors not speculators being associated with Cypress." (29) Source: "Will SunPower's Cameo Boost Its IPO", The Daily Deal, May 8, 2005. (30) Source: Cypress 3Q2006 earnings conference call on October 19, 2006; quote are by Mr. Rodgers. (31) Section 355 - Distributions of Stock and Securities of a Controlled Corporation; For more information, on Section 355(b)(2)(D), please see http://www.irs.gov/pub/irs-drop/rr-04-23.pdf and http://edocket.access.gpo.gov/cfr_2004/aprqtr/26cfr1.355-3.htm (32) Seagate Technology announced on March 29, 2000, that it would be bought by Veritas Software and an investment group including Silver Lake Partners in a complex $20 billion deal that left Seagate, which owned a 34% non-controlling stake in Veritas itself. (33) Source: Cypress 3Q2006 earnings conference call on October 19, 2006; quote by Mr. Rodgers. (34) Source: Cypress 3Q2006 earnings conference call on October 19, 2006; quote by Mr. Rodgers. (35) Intel Corporation went public in October 1971 at a split adjusted price of $0.24/share vs. today's valuation of over $20/share; however, it should be noted that following this IPO, holders of Intel who did not apply risk management to their portfolio's by holding Intel (despite its pricey 1971-1972 valuation) lost over 80% of their IPO investment when INTC reached $0.04/share during the 1973-1974 bear market. (36) Source: Cypress 3Q2006 earnings conference call on October 19, 2006; quote by Mr. Rodgers. (37) Ibid. (38) Ibid. (39) The litigation surrounding the Seagate/Veritas transaction was voluminous yet surmountable by Seagate's shareholder friendly CEO. (40) For example, Cypress reportedly defended itself vigorously and successfully (paying out nothing) against a class action suit involving a lead plaintiff that pointed at the college fund stake in Cypress indirectly owned by of the daughter of the plaintiff's attorney. (41) T.J. Rodgers has taken credit for reviewing "any solar project" and "adding value on the technical side" using Rodgers PhD. (42) Cypress allows for SunPower to utilize its manufacturing facility in the Philippines and communications systems, for example. (43) Source: Cypress 3Q2006 earnings conference call on October 19, 2006; quote by Mr. Rodgers. (44) During the Cypress 3Q2006 earnings conference call on October 19, 2006; Mr. Rodgers himself referred to "a lot of value" that comes from "arms length" agreements between SunPower and Cypress's "back end automation team in the Philippines." (45) Cypress has been moving an increasing percentage of its chip manufacturing to Grace Semiconductor Manufacturing's Shanghai, China facility. (46) On December 20, 2006, Cypress entered into a Guaranty with CIT Technologies Corporation for the benefit of Grace Semiconductor USA, Inc., following Cypress and Grace entering into a strategic foundry partnership in December 2005 involving Cypress's transfer of certain of its proprietary process technologies to Grace. (47) Source: Cypress 3Q2006 earnings conference call on October 19, 2006; quote by Mr. Rodgers. (48) Comparables include Integrated Device Technology, Inc., Atmel Corporation, LSI Logic Corporation and Agere Systems and for SRAM exposure Micron Technology, Inc.. (49) For every SunPower, there have been numerous gambles that did not pay off, including MRAM (magnetic memory) which Freescale Semiconductor Inc. was able to transition into a successful product. (50) Cypress reported 4Q2000 revenues of approximately $370 million. (51) Cypress announced that its Board had authorized the repurchase of five million of Cypress's outstanding shares; $125 million estimate assumes the Board considered the approximate $25/share market value the level at which it would be making the repurchase. (52) Source: Cypress press release dated November 30, 2000. (53) Source: Bloomberg, News, "Cypress Semiconductor Lowers 4th-Qtr Sales Forecast," November 30, 2000. (54) Cypress reported 3Q2001 revenues of approximately $180 million. (55) Cypress's stock was trading near $14/share at the conclusion on the 3Q2001. (56) Cypress's stock was trading at $3.60/share during the week of October 4, 2002. (57) Source: Morgan Stanley & Co. research report dated December 27, 2006. (58) Ibid. (59) Pun intended (60) Source: Morgan Stanley & Co.; conventional electric generators create electricity at a cost of around $3/watt, unsubsidized. (61) As a point of reference, thirty years ago the cost was approximately $30/watt. (62) Morgan Stanley estimates this will occur by 2010-2012 timeframe. (63) Source: Cypress 3Q2006 earnings conference call on October 19, 2006; quote by Mr. Rodgers. (64) Ibid. (65) On October 6, 2006, Cypress confirmed a disclosure in its Form 10-Q filed July 2, 2006, that it had "been exploring ways in which to more fully realize the value of [its] investment in SunPower Corporation for the benefit of [its] stockholders." Moreover, Cypress announced therein that it had "expanded the scope of [its] review to include a variety of strategic alternatives involving the Company as well as its investment in SunPower." (66) On October 19, 2006, Cypress announced that its Board had "terminated its process of evaluating a possible buyout of the Company and determined that continuing with its standalone strategy at this time [was] in the best interests of its stockholders." (67) On October 18, 2006, the day before the disclosure cited in footnote 30 below, one share of SPWR trading at approximately $32 had the purchasing power to buy approximately 1.7 shares of CY trading at approximately $19 each. On December 29, 2006, that same share of SPWR has the purchasing power to buy nearly 30% more shares (2.2 shares). (68) Source: Cypress 3Q2006 earnings conference call on October 19, 2006. (69) Ibid. (70) Ibid. (71) Ibid; quote by Mr. Rodgers. (72) Cypress's ownership of SunPower shall be diluted down to approximately 65% from 75% following the PowerLight merger. (73) Source: Cypress 3Q2006 earnings conference call on October 19, 2006. (74) Ibid. (75) Cypress common stock fell from approximately $19/share October 18, 2006 to approximately $16/share today. (76) Source: Cypress 3Q2006 earnings conference call on October 19, 2006. (77) SunPower common stock rose from approximately $32/share October 18, 2006 to approximately $36/share today. (78) Source: Cypress 3Q2006 earnings conference call on October 19, 2006; quote by Mr. Rodgers. (79) Source: Cypress 3Q2006 earnings conference call on October 19, 2006; quote by Mr. Rodgers.