Category: semiconductors

Semi trouble

-Contact Thomas Rasmussen, Greg Quick

There are bargains aplenty in the semiconductor sector. From Integrated Device Technology’s $20m tuck-in of Silicon Optix last month to Sun Microsystems’ takeover last April of Montalvo Systems for an estimated $25m, we’ve seen a flurry of lowball purchases of semiconductor startups over the past year. The reason? These companies tend to have a high burn rate, without much revenue to offset that. (For instance, we estimate that Silicon Optix generated just $4m in sales in the year leading up to its acquisition, while Montalvo was still a pre-revenue company.)

Of course, the semiconductor industry has been slumping for several years, with a sharp decline in valuations. While the number of deals has been tracking steadily at around 180 per year recently (147 so far this year), the amount spent on deals – a far more important figure – is down almost 40% from last year, and close to 80% from 2006. Things are not getting any better, either, at least according to our recent Tech Banking Outlook Survey. Bankers rated the semiconductor industry the lowest in terms of anticipated M&A spending for next year.

This dour outlook is likely to have an extremely negative impact on the semiconductor startups still out there trying to make it. And there are a lot of companies, backed by a lot of venture capital, trying to crack into markets that have taken much longer to materialize than ever imagined. For example, in the promising category of 10Gbase-T physical layer technology, we wonder about the outlook for Teranetics and Solarflare Communications. Also, we recently wrote about the troubles in the highly crowded and fragmented 10-Gigabit Ethernet controller space. Although Intel, Broadcom and the overall market are starting to show signs of life, the situation for the many startups in the sector is not looking any better. In fact, we heard recently that Neterion’s president might have thrown in the towel and that the company could be on the block. Having wagered in the vicinity of $100m, investors will undoubtedly take a bath on this one.

Marvell in the land of milk and honey

Brenon Daly

Contact: Brenon Daly, Gilad Nass

Having already handed over some shekels for Israeli companies in the past, Marvell Technology Group has reportedly gone on another shopping trip in the country. Israeli newspapers reported recently that Marvell has acquired Iamba Networks in a scrap sale. (Iamba, an optical semiconductor company, has its headquarters in Cupertino, California, but maintains a large R&D presence in Israel.) Reports put the purchase price of Iamba, which raised some $30m in funding, at $10m.

The pickup of Iamba, which Marvell declined to confirm, marks the company’s third purchase in Israel in recent years. In February 2003, Marvell paid $50m for Radlan Computer Communications. But Marvell’s big deal in the country came in late-2000, when it used a slug of its freshly minted IPO shares to buy Galileo Technology in a transaction initially valued at $2.7bn.

By the time the Galileo acquisition closed in January 2001, however, Marvell shares had lost more than half of their value. In fact, Marvell shares (on a split-adjusted basis) are currently trading only slightly above where they were when the company inked the Galileo purchase. Marvell shares closed at $5.09 on Tuesday, valuing the company at just slightly more than 1x its trailing sales.

RFMD takes a timeout

-by Thomas Rasmussen

RF Micro Devices is taking a break from M&A. The radio frequency semiconductor company told us after an investor conference last week that it will sit on the sidelines until at least the second quarter of 2009. The pause comes after a pair of tuck-ins (its $25m acquisition of Filtronic’s semiconductor business and its $24.1m purchase of Universal Microwave) and its $900m bet on Sirenza Microdevices late last year. The company plans to use the next six months to digest its earlier acquisitions.

As it holds off on inorganic growth, RFMD may need to focus on organic growth. Revenue has flatlined at about $1bn in the company’s past two fiscal years and it has lost money in three of its last four quarters. Meanwhile, its cash flow has dried up substantially. In its most-recent four quarters (ending June 30), RFMD reported negative EBITDA of $8m, which is down from a positive EBITDA of $175m in the year-earlier period. That slump has weighed on shares, which have shed two-thirds of their value so far this year. And that has not only cost the company, it has also cost the shareholders of Sirenza, who took two-thirds of their payment in RFMD shares.

Net effect from Intel’s buy

-by Thomas Rasmussen

It’s a somber 10-year anniversary for 10-Gigabit Ethernet vendor NetEffect. The company was picked up by Intel in a bankruptcy asset sale last week for a bargain $8m. Its technology, along with 30 of its engineers, will be rolled into Intel’s LAN Access Division. NetEffect has burned through some $50m in funding since recapitalizing in 2004. The company, which we once heralded as an innovator and potential leader in 10GigE technology, simply ran out of cash.

One reason for NetEffect’s scrap sale might be the increased competition. Big players like Intel, with its own organic offerings and its tuck-in of NetEffect, and Broadcom, with its $77m acquisition of Siliquent Technologies in 2005, have been crowding an already teeming market. This, coupled with scarce funding and lack of widespread adoption of the technology, makes us wonder what will happen to NetEffect’s surviving former rival startups still trying to stay afloat.

Venture capitalists have thrown hundreds of millions of dollars at 10GigE companies, with little to no payoff. We suspect the wind-down of NetEffect is an indication that VCs have had enough. Tehuti Networks, iVivity, Myricom, Neterion Technologies and Alacritech are some of the many startups in this sector that could potentially feel the net effect from this. In fact, iVivity seems to have quietly hit the switch already; its website is down and its phones are off the hook. Firms that will benefit from this include IBM, Hewlett-Packard, Dell and Hitachi, which are likely to follow Intel’s lead and peruse the bargain bin.

Known funding of select 10GigE players

Company Total funding Last round Status
Chelsio Communications $100m $25m series E (2008) Active
iVivity $60m $10m series D (2006) Missing in action
NetEffect $47m $25m series B (2006) Acquired by Intel for $8m
Siliquent Technologies $40m $21m (2004) Acquired by Broadcom in 2005 for $77m
Silverback Systems $51m $16m series D (2006) Acquired by Brocade Communications in 2007 for less than $10m*
Tehuti Networks Unknown Series B (2008) Active

Source: The 451 M&A KnowledgeBase *Official 451 Group estimate

Transmeta: No money? No credit? No problem

Brenon Daly

Just how desperate is Transmeta to get sold? Well, the pitch from the former high-flying semiconductor IP vendor now sounds like something we usually hear on late-night TV: easy financing. (‘No money? No credit? No problem. At Transmeta, we’re ready to do a deal with you.’) And honestly, that’s one of the only selling points left at the company, which retained Piper Jaffray six months ago to advise it on a possible sale. On Wednesday, Transmeta removed the word ‘possible’ and said it was starting the sale of the company. Shares jumped 20%, giving Transmeta a market capitalization of about $200m.

The financing comes into play because Intel, which had been slated to pay $100m to Transmeta in equal installments over the next five years, is writing a lump-sum check for $92m in the next few days. That’s on top of the $150m Intel has already paid to settle a patent lawsuit with Transmeta. As the company has noted, the settlement ‘strengthens’ its balance sheet, which effectively greases a deal by having the cash on hand to finance a transaction. Given the frozen credit markets, that’s not insignificant.

As to who might buy Transmeta, a year ago my colleague, Greg Quick, tapped Advanced Micro Devices as the most-obvious buyer. AMD, which licenses Transmeta technology, also owns a stake in Transmeta through its purchase of a block of preferred shares last year. Other companies that license Transmeta technology, including Sony, Toshiba and Fujitsu, also might be interested but are probably long shots. Whoever does end up buying Transmeta will get a bargain on the company, which never lived up to its hype. Transmeta’s sale price is likely to be in the neighborhood of one-tenth of the company’s valuation at its IPO eight years ago.

A flash-y, low-ball bid

Brenon Daly

SanDisk shot down a $5.85bn all-cash unsolicited bid from Samsung Electronics, saying the bid by the South Korean electronics giant doesn’t reflect the full value of flash memory provider. Despite the rejection, SanDisk shares surged 39%, closing at $20.92. Samsung bid $26 for each share. Last October, SanDisk shares changed hands above $50. Samsung made its offer public after saying four months of talks had come to nothing. SanDisk posted a loss and a sales decline last quarter. The company projects revenue for the current quarter will drop about one-quarter from last year. Included in SanDisk’s revenue is several hundred million dollars that Samsung pays SanDisk each year for patent royalties.

Chipping away

Brenon Daly

It’s one down and (at least) one to go for AMD. The battered chip maker moved earlier this week to dump its digital TV (DTV) chip business to longtime partner Broadcom. AMD will pocket $193m in cash from the divestiture. Although the unit had been on the block for some time, AMD got a decent price for the cast-off. We understand the DTV unit was generating in the neighborhood of $150m in sales, meaning AMD got more than the typical ‘1x and done’ divestiture multiple. Further, we would note that the valuation of the DTV business at 1.3x sales is about twice AMD’s own price-to-sales valuation.

With one of the legacy ATI Technologies businesses off the books, AMD can move on to unwinding yet another part of that disastrous acquisition. (Since AMD spent $5.4bn in cash and stock on graphics chip company ATI two years ago, shares of the second-largest chipmaker for computers have plummeted 70%.) The next unit on the auction block: Processors for multimedia applications that run on mobile phones. Rival Intel made a similar move two years ago, selling its communications processor unit to Marvell Technology for $600m, which valued the unit at an estimated 1.5x sales. We suspect AMD would be perfectly happy with that kind of valuation in any divestiture of its mobile business. As to who might be on the other side of the deal, two companies come immediately to mind: Qualcomm is always on the lookout for more IP, and communications chipmaker Atheros has done three acquisitions in the past two years and is said to be looking for more.

Corporate castoffs

Brenon Daly

Look who’s hitting the corporate garage sales these days – other corporations. While divestitures used to go most often straight to private equity shops, more than a few castoff businesses are now finding homes inside new companies. The latest example: AMD’s sale of its digital TV chip division Monday to Broadcom for $193m.

Given AMD’s struggles, as well as the fact that rival Intel has shed a number of businesses in recent years, the divestiture wasn’t a surprise. In fact, my colleague Greg Quick noted two weeks ago that AMD was likely to dump its TV chip business, naming Broadcom as one of the likely acquirers.

On the buy side, Broadcom joins fellow publicly traded companies Overland Storage, L-1 Identity Solutions and Software AG, among others, that picked up properties from other listed companies this year. That’s not to say that buyout firms have been knocked out of the market, despite the tight credit conditions. PE shops Vector Capital, Thoma Cressey Bravo and Battery Ventures have all taken businesses off the books of publicly traded companies in 2008.

Still, the activity by the corporate shoppers is noteworthy. And the list is likely to grow as more companies look to clean up their operations during the lingering bear market. The next name we may well add to the list is Rackable Systems, which said earlier this month that it is looking to shed its RapidScale business. (The divestiture would effectively unwind its acquisition two years ago of Terrascale Technologies, and comes after a gadfly investor buzzed Rackable for much of the year.)

As to who might be eyeing the assets, we doubt there are many hardware vendors interested in RapidScale, because they have either made acquisitions (Sun’s purchase of Cluster File Systems, for instance) or have partnerships (both EMC and Dell partner with Ibrix). However, a service provider could use the technology to enhance its storage-as-a-service offering. In a similar move, we’ve seen telecom giants like BT and Verizon pick up security vendors to offer that as a service. And finally, we’d throw out a dark horse: Amazon, which is one of Rackable’s largest customers, could use RapidScale’s clustered storage technology to bolster its S3 offering.

Cadence ends hostilities

Brenon Daly

Cadence Design Systems unexpectedly yanked its two-month-old unsolicited bid for rival Mentor Graphics Friday, scrapping a deal that would have given the chip design industry some much-needed consolidation. In pulling the $1.6bn all-cash offer, Cadence blasted Mentor for refusing to open its books. According to Cadence, that prevented it from lining up lenders to cover the $1.1bn it was planning to borrow for the deal. Mentor disputed that. It added regulatory review would have likely dragged out the process. Whatever the case, Mentor investors didn’t stick around. Mentor stock plummeted 26% to close at $10.33, compared to Cadence’s offer of $16 per share. For its part, Cadence stock rose 7%. Still both stocks are below the level they were when the dance began.

Post-acquisition decapitation

Brenon Daly

The write-offs from wrong-headed acquisitions just keep coming. And we don’t mean just financial write-offs. Instead, we’re referring to the practice of a company’s board ‘writing off’ the executives who crafted a deal. This week’s high-profile example came when Alcatel-Lucent finally tossed overboard the two architects of ‘la grande fusion.’ Since that deal was announced in April 2006, the combination has incinerated some $20bn over shareholder value, leaving the telco equipment vendor with a market capitalization of just $13.6bn. (That’s less than the sales the company posted in 2007.) That two-year performance finally got Serge Tchuruk, the company’s chairman who represents the Alcatel side of the combination, and Patricia Russo, the Lucent legacy, shown the door.

This house-cleaning at Acaltel-Lucent comes just two weeks after AMD kicked Hector Ruiz upstairs. In virtually the same breath that AMD announced Ruiz would be relieved of his CEO post but continue as chairman, the company said it will divest much of the business it picked up with its $5.4bn purchase of graphics chip maker ATI Technologies. Announcing the deal two years ago, Ruiz said his combination offered ‘limitless’ possibilities for innovation. Instead, the future of AMD looks rather limited, in large part because of the $2.5bn it borrowed to cover its disastrous purchase of ATI. AMD’s total debt stands at $5bn, compared with just $1.6bn in cash.

Meanwhile, a chief executive who we’ve always thought must be on the hot-seat for a misguided acquisition appears to have gotten a bit of a reprieve this week. Symantec CEO John Thompson said Wednesday that fiscal first-quarter sales of its backup products outpaced overall revenue growth. That reverses the recent weakness in the company’s storage offering, which Symantec acquired with its $13.5bn purchase of Veritas in December 2004. Wall Street applauded the company’s report, with shares up about 10% since Wednesday. Still, Thompson has yet to recognize much value from the three-and-half-year-old purchase of Veritas. Symantec shares, which changed hands at $21.74 midday on Friday, are still about $6 below where they were when the company picked up Veritas. Perhaps that goes some distance to explaining the loose rumors this week that something big – possibly the much-discussed divestiture of the storage business or even an outright sale of the company – was brewing at Symantec.

Leading the acquisition

Deal Stock performance since deal Status of acquiring company CEO since deal
Symantec-Veritas, Dec. 2004 Down 35% John Thompson, CEO since April 1999, continues to serve
Alcatel-Lucent, April 2006 Down 61% CEO Russo and chairman Tchuruk ousted this week
AMD-ATI, July 2006 Down 77% Long-time CEO Hector Ruiz replaced in mid-July
Secure Computing-CipherTrust, July 2006 Down 51% Chairman and CEO John McNulty replaced in April

Source: Company reports, The 451 M&A KnowledgeBase