Category: semiconductors

Microchip’s super multiple for Supertex

Scott Denne

Contact: Scott Denne

Microchip Technology continues its acquisitive streak, reaching for Supertex in a $394m all-cash deal and paying an enterprise value-to-revenue multiple of 3.7x, placing it among the most expensive semiconductor transactions in recent memory. The deal puts a 35% premium on Friday’s Supertex share price and brings the stock to a level it hasn’t hit since late 2007.

As margins and growth around its core microcontroller business compress, Microchip has looked to M&A to bolster its growth, inking roughly two acquisitions per year since 2009, compared with four transactions altogether between 2002 and 2008. With the exception of its $939m reach for Standard Microsystems last year, Supertex is its largest purchase and comes at a relatively rich price. Semiconductor multiples have been depressed for years as more transactions are done with the aim of consolidation and cost-cutting. Over the past 24 months, only two comparable deals in this space have had higher multiples.

Supertex’s $65.9m in trailing revenue will do little for Microchip’s top line – it posts $1.87bn in trailing revenue. This deal gets Microchip exposure to several new markets, notably LED lighting. LEDs accounted for an expanding share of Supertex’s growing revenue, generating 18% of sales in the most recent quarter, up from 14% in 2013 and 10% in 2012.

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Semiconductor M&A: bigger, fewer deals

Scott Denne

Contact: Scott Denne

Semiconductor deals keep getting bigger as the industry consolidates and the startups vanish. More buyers are looking for big targets where they can make significant cuts to operating expenses, rather than young companies that can bring them new products or revenue growth – largely because such young companies no longer exist. Avago Technologies’ $6.6bn purchase of LSI is a prime example.

Avago obtains a business that, last quarter, saw revenue decline 3% year over year to $607m but has better margins than Avago’s, something the acquirer plans to improve further by cutting $200m in annual operating costs out of the combined company in the second year following the deal’s close. At an enterprise value of $5.94bn, the transaction values LSI at 2.5x trailing 12-month revenue, higher than the 1.8x median multiple this year for vendors in its market.

Until the past few years, semiconductor suppliers had a pool of startups that could provide them with revenue growth (or at least the potential for growth with new products). Venture capitalists, however, have abandoned that space as the costs of building a chipmaker have soared and public market multiples for those businesses have stagnated. For the most part, chip startups are now extinct, and that’s unlikely to change anytime soon as almost all venture firms have refocused or eliminated partners that formerly specialized in chips.

That has led to an inverse relationship between the value and volume of deals in this sector: the median size of semiconductor purchases has been rising as the total number of such transactions has fallen. This year, the median price paid for a semiconductor provider rose to $75m, higher than it’s been in a decade and up from 2012 ($54m) and 2011 ($39m), according to The 451 M&A KnowledgeBase.

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Microsemi’s all about the margin

Scott Denne

Contact: Scott Denne

In picking up Symmetricom for $310m in cash ($230m in enterprise value), Microsemi is taking on a company whose margins are a far cry from its own goals. The semiconductor company has been fruitlessly chasing a self-imposed target of 60% profit margins and 30% operating margins.

Although adding a new element to an already challenging margin target, the deal will be accretive to its earnings per share.

Microsemi posted a 57% profit margin in its most recent quarter, although its operating margin of 10% is much farther away from its goal. Symmetricom reported a 45% profit margin and a negative operating margin. That makes this deal a bigger challenge than Zarlink, its last big purchase, whose margins were just a few points shy of Microsemi’s. Despite that, management claims Symmetricom will be running at its 60/30 target within 12 months of the deal’s close.

As it has in past acquisitions, Microsemi will prune legacy Symmetricom assets worth $10-15m in sales in order to give the target more favorable operating and profit margins. With this deal, Microsemi looks to add to its communications and defense businesses by picking up an asset that will, eventually, have a similar margin profile to itself.

Microsemi employed the same strategy in its acquisition of Zarlink in late 2011. With that deal, Microsemi planned to immediately chop 20% of Zarlink’s revenue-generating assets.

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Applied Materials reapplies cost-cutting M&A strategy

Contact: Tejas Venkatesh Scott Denne

In its biggest deal ever, Applied Materials is acquiring fellow chip manufacturing equipment vendor Tokyo Electron for $9.3bn in stock. The rationale for the transaction lines up closely with Applied’s cost-cutting motive in its $4.9bn purchase of Varian Semiconductor, and comes at a time when we expect limited revenue growth in the semiconductor equipment market.

In buying Tokyo Electron, Applied is projecting a $60m decrease in its quarterly operational expenses after a year and $120m by the third year following the close. Applied achieved similar (although smaller) results when it acquired Varian in the summer of 2011. Then Applied promised to shave $12m-16m off its quarterly expenses, and though it’s a quarter away from the deadline, its operating expenses came in at $556m last quarter – $14m lower than what Varian and Applied put up before the deal.

In a survey this month by ChangeWave Research, a service of 451 Research, 16% of semiconductor vendors indicated that their capital budgets would decrease for the next quarter, versus just 2% who expected an increase. That makes it an opportune time for Applied Materials to make a deal focused on cutting costs.

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Amid accounting review, Veeco buys Synos for up to $185m

Scott Denne

Contact: Scott Denne

Veeco Instruments is making a huge bet at an unusual time. The company is paying $70m in cash for atomic laser deposition systems provider Synos Technology, with earnouts potentially raising the total cost of the acquisition to $185m. Meanwhile, Veeco is undergoing an internal accounting review and hasn’t filed financial results in nearly a year.

Instead of acquiring an unproven company, Veeco should have bought itself an abacus. The company hasn’t filed financial results since the third quarter of 2012 as it reviews whether it recognized revenue on its metal organic chemical vapor deposition devices in the appropriate periods. The review could result in a shift in revenue to different periods. When it did report, it wasn’t pretty. Trailing revenue at the time fell 45% from the prior year, to $595m.

However, if Veeco can successfully integrate Synos and the target can meet its earnout milestones, the rewards would be substantial. Synos, which sells equipment that enables the manufacturing of flexible displays on cell phones, just began shipping its first product earlier this year. Nonetheless, Veeco anticipates that it will ship $80m in product next year, followed by $200m in 2015.

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Dialog Semiconductor pays $310m for iWatt

Contact: Tejas Venkatesh

A year after attempting to go public, iWatt has opted for the other exit, selling to fellow power management chip vendor Dialog Semiconductor for $310m in cash (plus contingent consideration of up to $35m). The deal should bolster Dialog’s product portfolio and expand its addressable market.

IWatt designs AC-DC converter chips and LED ICs. While iWatt’s AC-DC chips are used in portable chargers, Dialog’s power management ICs are embedded in mobile devices themselves. The target has grown at a healthy clip recently, wrapping up 2012 with $74m in revenue. That’s a 46% increase from the previous year.

The acquisition values iWatt at 4.1 times last year’s sales. That’s a premium valuation compared with the 3.4x sales valuation its chief rival Power Integrations currently garners in the public markets. IWatt’s superior growth definitely played into its higher valuation (Power Integrations grew just 2.2% last year).

IWatt tried to go public last summer, but the offering never made it to market. (The company even swapped out its lead underwriter – trading Deutsche Bank for Barclays – which is never a good sign.) It would have been fighting against a strong downdraft in the recent IPO market. The last three tech offerings have either priced below expectations or traded down significantly in the aftermarket.

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Mellanox buys again for optical interconnect portfolio

Contact: John Abbott

Less than a month after Mellanox Technologies agreed to spend $82m in cash to acquire silicon photonics component specialist Kotura, the Israeli interconnect firm is buying again. It will pay $47.5m in cash for IPtronics, a Danish optical interconnect component supplier with which it already does business. The deal, already approved by both boards, should close in the second half of the year.

IPtronics is a fabless semiconductor firm with headquarters in Copenhagen and offices in Menlo Park, California. It has 20 employees. The company produces low-power, high-speed analog chips designed for parallel optical interconnects aimed at the enterprise sector, with 10G, 40G and 100G data rates. These include vertical-cavity surface-emitting laser (VCSEL) drivers, modulator drivers and transimpedance amplifiers. IPtronics has shipped roughly four million units so far. Its fab partner is ST Microelectronics.

Mellanox says the acquisitions of Kotura and IPtronics are highly complementary. IPtronics components are already integrated into Mellanox’s server and storage interconnects. But as competition mounts and the speed of technical innovation in optical interconnects increases, Mellanox needs to be able to own all of the IP required to deliver complete end-to-end enhanced data rate InfiniBand and 100GigE offerings, which are expected to reach the market around 2015. Large server and storage customers are looking to use 100Gbps connections for the mid-planes of blade-chassis architectures and for hooking up 1U servers and storage systems.

For that, Mellanox needs to have control over all of the parts, from PCI Express through NIC/HCA, cables and switches, and to the other side of the storage or server system. Specifically, IPtronics provides Mellanox with analog transceiver technology that will enable it to support current VCSEL fiber optics and future silicon photonics: VCSEL starts to run out of steam at 100GB/sec speeds, while silicon photonics provides a roadmap to 400Gb/sec and 1TB/sec pipes. IPtronics components also bridge the gap between optical and electrical interfaces.

In March 2012, Sumitomo Electric Device Innovations bought the VCSEL component and transceiver product lines of EMCORE for $17m in cash – assets EMCORE had previously acquired from Intel in 2008. Other comparable deals include FCI’s pickup of the assets of MergeOptics in February 2010 for an undisclosed amount, Emerson Electric’s acquisition of Stratos International in May 2007 for $118m, and JDS Uniphase’s takeout of E20 Communications in May 2004 for $60m. There’s also an element of uncertainty in this sector, with one particularly aggressive player – Agilent spinoff Avago – fighting patent-infringement lawsuits against all of its competitors, including both Mellanox and IPtronics, as well as Emerson, FCI, Finisar, JDS Uniphase and Methode Electronics.

Mellanox’s financials continue to look strong, despite a few quarters of missed expectations recently. In fiscal 2012, its revenue came in at $501m, up 93% year over year; Q1 2013 revenue was $83m and the guidance for Q2 is $92.5-97.5m. The company has more than $400m in cash and short-term investments. However, Mellanox is currently delisting itself from the Israeli stock exchange following some conflicts with institutional investors in its home market, which has dragged down its share price. It will continue to trade on the Nasdaq.

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Mellanox buys Kotura for its interconnects

Contact: John Abbott, Tejas Venkatesh

New workload demands from large-scale Internet datacenters are driving M&A activity around interconnects, which are required to move large virtual workloads from server to server. Mellanox Technologies is the latest vendor to buy in this market, announcing on Wednesday an agreement to acquire Kotura for $82m in cash. Mellanox plans to use Kotura’s technology and patents to build end-to-end interconnects for datacenters, supporting 100Gbps Ethernet protocols.

Kotura designs, manufactures and markets application-specific silicon photonics circuits. Silicon photonics technology promises to provide a low-cost, high-performance means of connecting standard system modules together into more fluid pools of system resources. Nine-year-old Kotura raised $39m in venture capital funding from ARCH Venture Partners, ComVentures and other firms.

Mellanox will pay $82m in cash for Kotura, and expects to assume approximately $8m in equity awards. While respectable, our understanding of the price-to-sales valuation for Kotura does fall below what we estimate Lightwire received in its $271m acquisition by Cisco. (Subscribers to The 451 M&A KnowledgeBase can view our estimated revenue for Kotura here and for Lightwire here.)

Demand for datacenter interconnect vendors appears to be growing, as evidenced by a handful of relatively rich exits announced in the past two years. Intel is particularly interested in this market, having reached for Fulcrum Microsystems, Cray’s HPC interconnect hardware assets and QLogic’s InfiniBand assets.

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Altera moves into power management with $134m Enpirion buy

Contact: Tejas Venkatesh

FPGA designer Altera has announced the acquisition of power management chipmaker Enpirion for $134m in cash ($141m including the assumption of debt). The deal should bolster Altera’s FPGA systems by reducing board space and improving power management.

Enpirion makes power system-on-a-chip DC-DC converters that enable greater power densities and lower noise performance compared with their discrete equivalent. The 12-year-old target, which originated as a spinoff of Bell Labs, raised $77m in several rounds of funding from Canaan Partners, Columbia Capital and other firms. Enpirion is expected to generate $20m in revenue this year and $35m next year. The transaction values Enpirion at 7x this year’s sales.

The deal comes nearly a year after wireless semiconductor giant Qualcomm bought programmable power management chipmaker Summit Microelectronics for an estimated $100m. The chip world’s constant pursuit of Moore’s Law results in higher performance, but also creates complexity in power management. These acquisitions are aimed at mitigating that problem.

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Checking the pulse of health IT

Ben Kolada

Contact: Ben Kolada

Healthcare IT is alive and well, as evidenced by the emergence of new consumer technologies, exceptionally high valuations and investments by some of the largest old-line technology vendors. New regulations, advances in sensor technologies and ‘big data’ analytics are driving many aspects of this market for both consumers and enterprises.

New devices that track fitness, sleep and other personal health metrics are driving adoption of healthcare IT by consumers. Nearly every new wearable technology product being introduced offers some health-monitoring component. The consumer healthcare IT market is already moving from hopeful hype to valuable reality, with Jawbone recently reportedly paying more than $100m for BodyMedia. BodyMedia is Jawbone’s third acquisition; all were announced this year and all focused on healthcare.

For enterprises, Cerner’s $50m acquisition (excluding $19m earnout potential) of bootstrapped employee healthcare management software vendor PureWellness shows the variety of businesses that can make money in enterprise healthcare IT. And consolidation in the health information exchange (HIE) sector continues to go off for about 10x sales. Meanwhile, ad-supported electronic health record (EHR) startup Practice Fusion is widely expected to be considering an IPO soon. The company’s growth is attributed in large part by government initiatives incentivizing medical practices to adopt EHRs.

As for investments, Oracle recently participated in the $45m second tranche of Proteus Digital Health’s series F financing (which brought the round’s total to $62.5m). Proteus offers an ingestible sensor, used by patients to monitor internal health and by clinicians to monitor clinical trialists’ drug dosing. The plummeting cost of genome sequencing has led to a rise of big-data bioinformatics startups hoping to help make sense of the mountains of genetic data. Startups such as Bina and Spiral Genetics have recently raised capital from traditional VC firms.