Transmeta Corporation (NDAQ:TMTA) shares rallied today after Riley Investments disclosed a 5.9% stake in the company and demanded that the company review its strategic alternatives. The activist hedge fund also indicated its belief that the stock is undervalued relative to its intrinsic value and peers. Shareholders are hoping that the company will heed the advice and work to unlock shareholder value.

Riley Investments said it believes that the public market valuation reflects a negative enterprise valuation despite strong prospects for positive free cash flow in 2008 and the five years for which it will be paid license fees under its recent agreement with Intel. Moreover, the hedge fund indicated that after Intel's first $150 million payment, Transmeta will have close to $180 million in cash on its balance sheets. This equals out to $13 per share in cash compared to the market value of $12 per share!

Riley Investments demanded that the company review its strategic options to enhance shareholder value. Specifically, the hedge fund recommended that the company sell the intellectual property to a company who can better leverage the costs associated with pursuing the strategy, delist from the NASDAQ, go "dark" to significantly reduce public company costs, or finally, engage in a significant dutch tender offer to unlock value.

In the end, this is all good news for shareholders as it means the company's intrinsic value could be realized. Whether or not the company takes action remains to be seen, but this is definitely a stock worth watching closely!

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