Category: semiconductors

Qualcomm scales power management with Summit Micro buy

Contact: Ben Kolada, Thejeswi Venkatesh

Adding to its power management product portfolio, semiconductor giant Qualcomm announced on Monday the acquisition of Summit Microelectronics, a designer of programmable power management and battery-charging semiconductors. The deal is meant to help Qualcomm further target increasing demand for battery management on smart devices.

Neither Qualcomm nor Summit disclosed terms of the transaction, but in March Summit issued a press release claiming that it hit record revenue and profits in 2011, and that fourth-quarter 2011 revenue doubled from the prior-year period. However, that alone shouldn’t impress too much. The company had to raise several rounds of funding throughout its 15-year lifetime to bring its products to market. While most venture-backed companies typically continue to fundraise only through to maybe a fourth, or D, round, Summit’s messy fundraising history continued at least through to an H round.

The acquisition is yet another step in feeding the demand for managing power on an ever-evolving group of power-intensive devices. As consumer electronics continue to advance, particularly in regard to HPC capabilities and high-resolution screens, battery management is becoming increasingly critical. In announcing the deal, Qualcomm points directly at this demand, noting that Summit’s chips are found in a variety of mobile phones, tablets and e-readers.

Cypress Semiconductor returns to M&A

Contact: Thejeswi Venkatesh

After staying out of the M&A market for four years, Cypress Semiconductor stepped back in earlier this week with an $87.6m unsolicited cash bid for ferroelectric RAM designer Ramtron International. However, this isn’t the first time that Cypress has tried to acquire its smaller rival. Cypress revealed that it tried to buy Ramtron’s equity last year for approximately the same amount, an offer the company flatly declined.

Cypress’ bear hug comes at a time when Ramtron has struggled to increase its business under existing management. Last year, the company generated sales of $66m, virtually unchanged from 2008. For its part, Cypress has seen its revenue increase at a healthy rate, going from $765m in 2008 to $995m in 2011. Cypress, which has asked Ramtron to respond to its offer by next week, has engaged Greenhill & Co as financial adviser while Needham & Co will advise Ramtron.

On its return to M&A, Cypress is focusing on a business it knows well: memory chips. The company has a blemished history in trying to expand its product offering through inorganic means. For instance, Cypress divested SMal Camera Technologies in 2007 for $11.4m, approximately one-quarter the $42.5m it paid for the company just two years earlier. Similarly, Cypress acquired FillFactory for $100m in the summer of 2004 but sold the division to ON Semiconductor in early 2011 for a mere $31.4m.

Select Cypress M&A

Date announced Target Deal value Focus
August 1, 2008 Simtek $46m High-speed memory chips
February 14, 2005 SMaL Camera Technologies $42.5m CMOS image sensor ICs
June 22, 2004 FillFactory $100m CMOS image sensors
October 20, 2003 Cascade Semiconductor $9.4m Memory semiconductor design
April 10, 2003 Micron (SRAM unit) Not disclosed Synchronous SRAM
January 08, 2002 Silicon Packets $24.5m 10Gbps framers

Source: The 451 M&A KnowledgeBase

Spurred by JOBS Act, iWatt puts in its paperwork

Contact: Thejeswi Venkatesh

Taking advantage of the newly enacted JOBS Act, iWatt recently filed its IPO paperwork in an effort to raise $75m. The power management semiconductor designer has been around since 2000 and has raised more than $50m in venture funding over five rounds. For its next funding, it’s looking to be among the first wave of companies to make it to the public market under the new federal legislation, which lowers the disclosure requirements, among other changes, for IPO candidates. Barclays Capital and Deutsche Bank Securities are co-leading the IPO.

The company has grown at a healthy clip recently, with revenue nearly tripling from $18m in fiscal 2009 to $57m in the 12 months ending March 2012. However, that may not be enough to ensure a warm reception from investors. The concern? Competition. More than 80% of iWatt’s revenue comes from the highly fragmented AC/DC conversion market, where it competes with bigger players such as Power Integrations and Fairchild Semiconductor. The company, which counts Philips and Apple among its customers, says its product has better form factors and lower cost compared to its rivals.

Its chief rival, Power Integrations, currently garners an enterprise value-to-revenue multiple of just over three in the public markets. Slapping the same multiple on iWatt means that the company will debut with a meager market cap of $175m. (Of course, iWatt may well enjoy a premium over its main rival because of its growth rate. Power Integrations flatlined last year and is projected to only grow about 10% this year, while the much-smaller iWatt has bumped up sales more than 60% in each of the past two years.) On the other hand, Wall Street – particularly the big institutional investors – hasn’t shown much demand for any equities lately, much less a new offering from a tiny, unproven startup in a hotly competitive market.

Audience tries to make IPO noise before Facebook debut

Contact: Thejeswi Venkatesh, Ben Kolada

Although Facebook’s road show may have delayed some companies’ IPO itineraries, audio processing vendor Audience is continuing with plans to begin trading on the Nasdaq on May 10. Facebook has dominated recent IPO chatter (a quick Google search for ‘Facebook IPO’ generates more than 312 million results, versus just five million for ‘Audience IPO’), but Audience’s market opportunity should help the company create some noise of its own.

Audience designs digital signal processors and associated algorithms that help separate human voice from background noise, thereby helping to improve voice quality on mobile phones. The technology also helps improve the responsiveness of speech-recognition software. Apple, for example, uses Audience’s chip in the iPhone 4S.

So far, the market has been receptive. The patient firm, which was founded in 2000 but didn’t start pushing product until 2008, has grown revenue fifteenfold over the past few years, from $6m in 2009 to $97m in 2011. That growth story should pay off in spades for its selling shareholders, notably NEA, Tallwood Venture Capital and Vulcan Capital, which collectively own 87% of the company (combined, they poured $75m into the firm).

Audience plans to raise $80m by offering 5.3 million shares in the range of $14-16 per share. Assuming it prices at the midpoint, Audience will garner a market cap of just under $300m, or three times trailing sales. That valuation is in the ballpark of where rival Maxim Integrated Products currently trades in the public markets. J.P. Morgan, Credit Suisse and Deutsche Bank are leading Audience’s IPO. This is likely to be the last tech IPO before Facebook’s debut.

AMD now faces a fabless future

Contact: John Abbott

Advanced Micro Devices is now officially a fabless semiconductor company. Under the leadership of its recently installed CEO Rory Read, AMD has renegotiated the terms of its agreement with GLOBALFOUNDRIES (GF), finally relinquishing its stake in the chip-manufacturing arm that it originally spun off at the end of 2008. It’s a complex arrangement, but the net result is that AMD no longer has to buy from GF and is free to play the market. That’s good for a number of reasons, not least being that problems ramping up 32nm and 28nm production at GF last year delayed the launches of both AMD’s Fusion graphics processors and Opteron CPU product rollouts, hurting its competitiveness against rivals Intel and NVIDIA and directly hitting its bottom line.

AMD isn’t likely to use that trump card straight away. The company says it has no current plans to dual-source its Fusion APUs (the combined CPUs and GPU semiconductors that are crucial to its future), and it has agreed to set up a framework with GF to negotiate prices for wafer fabrication in 2013 – but that doesn’t mean it won’t be looking hard for better deals elsewhere, just as other fables semiconductor firms do as part of their daily business. AMD must be hoping that its freedom to go elsewhere will provide enough incentive for GF to stick more closely to its deadlines in the future. AMD already has a close relationship with GF rival Taiwan Semiconductor Manufacturing Company, which acts as a second source for Fusion chipsets – and that relationship might well be deepened.

What does AMD lose along with its manufacturing arm? Preferential pricing, of course, because it was buying its wafers at cost from GF, and these will now be subject to a negotiated fixed-price contract, dependent on volumes. In SEC filings, AMD says it now expects to spend $1.5bn for wafer fabrication with GF in 2012 (up from $904m in 2011). On the other hand, it will spend less on R&D on the manufacturing side ($71m in 2012, down from $79m last year) – and nothing on capital manufacturing assets for the fab, which cost it $34m in 2011.

GLOBALFOUNDRIES, based around AMD’s original manufacturing facility in Dresden, Germany, was spun off with financial help from Advanced Technology Investment Company (ATIC) and Mubadala Development, both investment arms of the Abu Dhabi state. They took a 67% stake between them – ATIC 44.4% and Mubadala 19.3%. But in late 2009, ATIC announced the acquisition of Chartered Semiconductor for an enterprise value of roughly $4bn and set about combining it with GF, diluting AMD’s stake in the process. Further investments in a new facility in upstate New York took AMD’s stake below 10% by the end of last year.

Now AMD has transferred the remaining capital stock that it was holding in GF, 1.06 million shares worth $278m, back to the fab itself. Along with the stake goes the remainder of a five-year exclusive manufacturing arrangement. To get out of these commitments, AMD will pay GLOBALFOUNDRIES $425m over the next two years – an amount effectively replacing cash incentives that AMD had agreed to pay the fab in 2012 under the old agreement. The $278m and $425m payments will be recorded as a one-time charge on AMD’s Q1 balance sheet.

Lam’s novel move

Contact: Thejeswi Venkatesh, Brenon Daly

At a time when chipmakers are lowering their outlook, citing the economic downturn and the flooding in Thailand, semiconductor equipment maker Lam Research on Wednesday announced its plan to acquire Novellus Systems for $3.3bn in equity. The deal comes a little over a month after Novellus’ primary competitor and industry leader Applied Materials Inc closed its $4.9bn acquisition of Varian Semiconductor. Novellus stockholders will receive 1.125 shares of Lam for each share they own, representing a per-share price of $44.42. Novellus hasn’t traded that high since 2002.

Lam’s offer values Novellus at 7.9 times trailing EBITDA, which is only about half the 14.3x valuation that Varian received in May. (Similarly, Novellus is being valued at only about half the price-to-sales multiple of Varian, 2x trailing compared with 4x trailing for its rival.) However, we believe the deterioration in market conditions and the fact that Novellus is coming off two years of operating losses account for the lower multiple. In any case, the market seems to back the price Lam is planning to pay because shares are largely unchanged on the announcement. Goldman Sachs advised Lam, while Bank of America Merrill Lynch banked Novellus. This is Lam’s first notable purchase since 2007, when it bought EZ Holding for $568m.

Synopsys heats up EDA M&A with Magma buy

Contact: Thejeswi Venkatesh

After sitting out of the market for the first eight months of the year, Synopsys is suddenly on a buying spree. Having snapped up two smaller players in as many months, the largest electronic design automation (EDA) player has announced a definitive agreement to buy Magma Design Automation for $7.35 per share in cash, representing an enterprise value of $507m.

Size matters in the mature EDA market, and Synopsys claims that the combined company will be better able to invest more in R&D and further ‘technology acceleration’ in areas such as mobile chips. However, there are concerns about whether the deal will pass regulatory muster, given substantial overlap in product offerings. That explains the asymmetry in breakup fees – Synopsys will pay $13m more if it fails to close the acquisition than what Magma would pay if it backs out ($30m vs. $17m).

The deal values Magma at a trailing sales multiple of 3.6, based on reported revenue of $142m. That’s a handsome valuation compared to the 2.2x multiple that Mentor Graphics, the next-largest player after Magma, was offered by Carl Icahn in his unsolicited bid earlier this year. Synopsys will use existing cash ($230m of which is onshore) and debt to finance the deal. Qatalyst Partners banked Magma. We’ll have a full report on this deal in tonight’s Daily 451.

Sterling Partners aids Mosaid

Contact: Thejeswi Venkatesh

Earlier this month, Wi-LAN indicated it would ‘pack up and move on’ if Mosaid Technologies’ shareholders did not accept its sweetened $42 per share unsolicited offer. But in a rather unusual turn of events, it is Mosaid that has moved on. On Friday, the chip technology company announced an agreement with buyout shop Sterling Partners to go private at $46 a share in cash. (Sterling’s bid values Mosaid at about 10 times trailing EBITDA and represents the highest price for the stock in more than a decade.)

Ontario-based Mosaid has many characteristics that make it a good LBO candidate. For instance, it generated $32m in operating cash flow last year. Even more importantly, that cash flow has been fairly predictable thanks to fixed payment agreements with the likes of Hynix Semiconductor, IBM and Samsung. (During the recession-hammered years of 2008 and 2009, Mosaid still generated about the same level of cash from operations.)

And finally, the company has a robust patent portfolio of 2,800 patents. As we have seen in a number of deals recently, IP is increasingly playing a role in M&A, whether it’s the acquisition of Nortel Networks’ patents by a group of companies led by Apple, or the subsequent $12.5bn purchase of Motorola Mobility by Google, the second-largest tech transaction of 2011. Mosaid’s large – and growing – portfolio of patents could well add a bit more to Sterling’s return, when the private equity firm looks to exit this deal.

Chip M&A headed for slowdown

-by Thejeswi Venkatesh, Ben Kolada

So far, 2011 has been a banner year for semiconductor M&A – the first three quarters have already yielded the highest aggregate spending on chip deals since 2006. But now, the industry seems to be headed for a slowdown.

Industry veteran Fairchild Semiconductor recently reported third-quarter revenue of just over $400m, better than expected but still down 7% sequentially and 3% from the year-ago period. Continuing the decline, the company provided a bleak outlook for the fourth quarter, citing weak demand in the end markets that it serves – particularly the computing and consumer sectors. And the drop-off shouldn’t be taken lightly, considering demand typically picks up in the fourth quarter due to the holiday season and increased consumer spending.

Coinciding with Fairchild and the greater semiconductor industry’s slowdown, dealmaking has also taken a nosedive. The aggregate value of all semiconductor transactions in the just-closed third quarter was $6bn, the lowest this year, and Broadcom’s $3.9bn acquisition of NetLogic Microsystems alone accounted for more than half of that amount. Further, volume slid as well, with only 32 deals announced in Q3, one-third less than the total volume announced in the first two quarters of the year.

Semiconductor M&A activity, 2011

Quarter Deal volume Deal value Number of deals valued at $1bn or more
Q3 32 $6.17bn 1
Q2 45 $16.49bn 3
Q1 43 $8.34bn 2

Source: The 451 M&A KnowledgeBase

Certainty for some, uncertainty for others

Contact: Thejeswi Venkatesh

Despite a few high-profile acquisitions recently, some companies have trouble finding buyers. For instance, STX pulled out of contention for Hynix Semiconductor, citing market uncertainties. This was the third time in as many years that the creditors-turned-owners of Hynix, whose revenue mix consists of more than 70% DRAM and about 25% NAND flash, have tried to unburden themselves of their stake. Hynix now has just one suitor, SK Telecom, a dynamic that probably won’t help the company’s sale price.

The fact that STX is walking away isn’t surprising, given the erosion of business at Hynix. In a recent filing, Hynix indicated that its revenue in the recent quarter declined 16% to $2.4bn on a year-over-year basis. The company reported that DRAM sales will further decline due to falling PC sales although Flash, used in all mobile phones, will see a moderate increase. Hynix’s primary competitor, Micron Technology, also saw a decline in sales and is currently trading at less than 1 times sales and a paltry 1.8x trailing EBITDA. Both Micron and Hynix operate at a gross profit in the mid-20% range. (To put things in perspective, Qualcomm runs at an overall profit margin of 30%.)

Of course, these travails are not limited to the tech sector. Cerberus Capital Management and a partner recently withdrew their bid for Innkeepers USA, a hotel chain operator, also blaming market uncertainties. The two sides are currently fighting it out in court over whether the buyout shop and its partner has to hold to its plan, or whether there has been a ‘material adverse change’ that lets the would-be buyers walk away from the deal.