Life after a breakup

by Brenon Daly

A lot has happened since Qualcomm announced its as-yet-unclosed $44bn acquisition of NXP Semiconductors in October 2016. The would-be buyer has successfully fended off an unwelcome suitor in what would have been the tech industry’s largest transaction. It has seen a former king at the company look to raise an army and reclaim the throne. Meanwhile, as Qualcomm’s deal has languished in limbo, more than 150 other chipmakers have been gobbled up, according to 451 Research’s M&A KnowledgeBase.

While those matters are mostly closed, Qualcomm’s bid for NXP remains open. At least it remains open for another day. The deadline for gaining the last remaining regulatory approval for the transaction is Wednesday night, just hours after it is scheduled to report fiscal third-quarter results.

Qualcomm and NXP have the green light from all of the necessary national and international bodies except one: China. Qualcomm extended its bid for NXP last April, when it refiled its application to China’s Ministry of Commerce. At the time, the company said it would walk away from the deal if it didn’t get approval on July 25 and pay a $2bn breakup fee to NXP the following day.

Right now, that appears likely to happen. Investors have put almost a 20% discount on NXP shares, compared with Qualcomm’s already raised offer of $127.50 in cash for each share of NXP. Over the past month, the discrepancy between the two prices has widened in almost every trading session. In mid-afternoon trading on Tuesday, NXP stock was changing hands at about $102.

Of course, that period has also seen a near continuous escalation in the trade war between the US and China. (We recently noted how tech acquisitions and investments have suffered pretty serious collateral damage in the ongoing spat between the two economic superpowers. China is currently on pace to purchase the fewest number of US tech providers since the country began shopping here about a half-decade ago, according to the M&A KnowledgeBase.)

Assuming Wall Street’s terminal view of the deal does indeed come to pass, what will happen to the two sides? For NXP, it’s pretty simple: deposit the $2bn termination fee into its treasury and go on with business. (It’s a pretty significant windfall for the company, which generated only $2.2bn in profit in all of last year.)

For Qualcomm, which would remain inexorably tied to the ever-maturing cellphone market, the options are a bit more limited. Nonetheless, one move we can probably rule out: Unlike Broadcom, the chipmaker that tried to buy Qualcomm, we don’t see the 33-year-old semiconductor provider announcing a multibillion-dollar purchase of a software vendor. Even two weeks on, Broadcom’s $19bn acquisition of CA Technologies is still a bit of a head-scratcher.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

MIPS takes Wave to the edge

Eyeing a move from training to endpoints, Wave Computing has acquired MIPS Tech, a pioneer in the development of RISC processors. The target, recently spun off of Imagination Technologies, provides the buyer, a designer of artificial intelligence (AI) semiconductors, the chance to sell its wares more broadly as organizations look to run AI algorithms directly on the endpoint.

Founded in 2010, Wave is one of multiple startups producing accelerators for AI workloads, and one of a smaller select group (along with Cambrian Systems, Cerebras Systems, Graphcore and Horizon Robotics) that have already raised over $100m in venture funding. Wave emerged from stealth in 2016 and made its compute appliance for training neural networks available to early-access customers in 2017. In March, Wave said it would be using the MIPS core as the integrated CPU within its next-generation Dataflow Processing Unit.

We noted in a previous report that MIPS would likely prove a valuable asset for AI applications. It’s been in business since the 1980s and has a significant embedded systems user base and a range of extensible cores. Once owned by SGI, MIPS ended up as part of UK-based GPU maker Imagination Technologies, but when Imagination was sold to China-based investor Canyon Bridge Capital Partners, US-based MIPS had to be divested separately to Tallwood Venture Capital for $65m. Tallwood is also an investor in Wave.

It’s likely that the power-efficient MIPS cores will be useful for the development of inference processors within edge devices, giving Wave an end-to-end story beyond its initial training focus, increasing its potential total addressable market significantly. MIPS will continue to be run as an independent unit, and will continue licensing its cores to third parties. 451 Research’s recent VotE: Internet of Things report shows that many companies are already making advanced calculations right on the endpoint – 40% of respondents claimed to run data analysis, cognitive computing or AI at the network edge or perimeter.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

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

Dual track, but singular outcomes

Contact: Brenon Daly

For the third time in just two months, a tech company that had planned to go public has instead ended up inside a company that’s already public. The latest dual-track sale came Wednesday when Force10 Networks opted to accept a bid from Dell rather than see through its IPO plan. The networking gear vendor had filed its prospectus in March 2010.

The deal follows one month after would-be debutant Apache Design Solutions sold to ANSYS and two months after SiGe Semiconductor went to Skyworks Solutions. Those three transactions probably only generated about $1.2bn in liquidity, including Force10’s reported price of roughly $700m. (As a side note, we might point out that Deutsche Bank Securities was a book runner on all three proposed IPOs.)

As this trio of enterprise-focused startups finds itself snapped out of the IPO pipeline, consumer-oriented companies continue to receive a warm welcome on Wall Street. Consider this: Zillow, which went public earlier this week, now trades at about 20 times trailing revenue. In contrast, Force10, SiGe and Apache Design garnered much more modest valuations ranging roughly from 2-6x trailing revenue in their sales.

Taking chips off the table

Contact: Brenon Daly

A half-decade after financial buyers did their best to sweep up the semiconductor industry, it’s now the fellow corporate acquirers’ turn to continue the dealmaking. On Wednesday, Applied Materials Inc announced that it would hand over $4.9bn for Varian Semiconductor Equipment Associates. The deal between the chip equipment makers comes on the heels of two other multibillion-dollar transactions in the semiconductor sector earlier this year: Texas Instruments’ reach for analog chip maker National Semiconductor and Qualcomm’s bid to expand beyond cellular chips with its purchase of Atheros Communications.

All three of this year’s significant chip acquisitions rank among the 10 largest deals in the industry. However, all of the corporate transactions are still looking up at the buyouts done by private equity (PE) shops back when credit was cheap and easy. In fact, the total spending on the trio of landmark deals so far this year ($15bn) is less than the $17.6bn take-private of Freescale Semiconductor by a PE consortium in 2006.

Of course, bigger isn’t necessarily better. And we suspect that corporate buyers would hope to be at least a little more successful with their acquisitions than the buyout club has been with Freescale. Although Freescale is currently on file to once again be a public company, the buyout has been a tough one for its owners. Much of that difficulty stemmed from the fact that the PE shops put nearly $10bn of debt on the company. (It paid more than a half-billion dollars last year to service the debt.) Meanwhile, under its new ownership, Freescale is actually smaller than it was before the buyout.

TI-NatSemi: Large and analog

Contact: Brenon Daly

The fragmented market for makers of analog integrated circuits looks a whole less scattered now that Texas Instruments has reached for National Semiconductor. Already the largest analog vendor, TI will have some 17% of the market provided its $6.5bn all-cash offer for NatSemi closes later this year. (If it can’t close the deal, for whatever reason, TI faces a $350m reverse breakup fee, while NatSemi would have to pay a $200m termination fee.)

As it stands, the pending purchase of NatSemi would be the third-largest semiconductor deal, but the single largest by a non-financial buyer. Recall that in the pre-Credit Crisis days of 2006, buyout consortiums took Freescale Semiconductor private in a $17.6bn buyout while another private equity (PE) club carved the semiconductor business out of Royal Philips Electronics. Given the travails that the Freescale LBO has faced over the past half-decade, we suspect that PE shops won’t be looking to do any buyouts that big anytime soon.

Qatalyst strikes again, but bigger

Contact: Brenon Daly

When Jason DiLullo joined Qatalyst Partners last April, the boutique firm announced that he would play a major role in expanding the firm into semiconductor deals. Indeed he did. Qatalyst is getting sole credit for advising Atheros Communications on its sale to Qualcomm, the largest chip acquisition in four years. (On the other side, Goldman Sachs and Barclays Capital advised Qualcomm.) With an equity value of $3.6bn, it is Qatalyst’s largest deal – by about $1bn, no less – since it opened its doors in March 2008.

The chip deal brings the total value of the 10 transactions that Qatalyst has worked on to more than $17bn. Of course, the firm is primarily known for its role in helping to consolidate the storage sector, working on the sales of Isilon Systems and 3PAR last year, as well as Data Domain in mid-2009. (All three of those companies were erased from the market at their highest-ever valuation.) Collectively, the equity value of those three storage deals is about $7bn – ‘only’ twice the amount of Qatalyst’s sole chip deal.