Contact: Scott Denne
Analog Devices looks to the cellular infrastructure market to burst out of its growth funk, paying $2.4bn to acquire Hittite Microwave. Not only is the purchase Analog’s largest by a factor of 20, it also has an unusually high multiple.
In the company’s most recent quarter, sales of chips for the communications infrastructure market jumped 25% year over year, surpassing management’s expectations for the sector. (Communications accounted for 20% of its 2013 revenue.) That level of growth – beyond anything Analog typically sees in its various segments – points to a way out of the company’s growth slump. The signal-processing vendor’s annual revenue skidded down 12% between 2011 and 2013.
Hittite specializes in communications chips that utilize high frequencies, compared with Analog’s communications portfolio, which was built around the lower frequencies typically used in cellular communications. As frequencies become increasingly crowded, cellular signals are drifting into higher frequencies, and Hittite has benefitted, as its portfolio, which was initially geared toward government and military applications, has seen growth in the broadband and cellular markets.
While Analog expects there will be opportunities to cut costs when the deal closes, the chance to grow by cross-selling the higher- and lower-frequency products drove this acquisition – and pushed up the price to 7.1x Hittite’s trailing 12-month revenue. Since cost synergies, not new sales, drive most chip transactions these days, the multiple for Hittite is substantially larger than most. In fact, it is three times larger than the median for chip deals of more than $500m in the past 12 months and is the highest multiple paid in such a transaction since Broadcom’s reach for NetLogic Microsystems in September 2011.
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