When M&A Smoke May Signal Fire

The oft-speculated semiconductor target could finally draw a suitor.

There's M&A chatter surrounding chipmaker Xilinx again. Could there be something to it this time?

Talking It Up

Xilinx shares have been buoyed by takeover speculation before, but this time feels different.

Source: Bloomberg

The $12 billion company detailed new change-of-control provisions late Wednesday that would confer certain benefits to its top executives should they leave as part of a takeover. It's not unusual for companies to have these types of provisions, especially in an industry that's been consolidating as frenetically as the semiconductor sector (around $120 billion in deals and counting  in the past two years or so). But for a company that's been speculated as a target as much as Xilinx has, that little contract change was -- and should be -- a big deal for investors.

Shares of Xilinx shot up as much as 12 percent on Thursday for one of the biggest gains among members of the S&P 500 Index. The company also reported fiscal third-quarter earnings late Wednesday that were pretty decent, but there was little doubt that the gains had a lot more to do with the prospect of a takeover finally getting done.

Xilinx is one of the few attractive, big semiconductor acquisition candidates still standing after the crescendo of dealmaking across the industry. And there's a lot to like from a suitor's perspective. For one, the company is a direct competitor to Altera, which was acquired by Intel last year. Both make chips that can be programmed for varied functions, in contrast to custom-made semiconductors that tend to be pricier. As such, Xilinx offers the same type of high-margin opportunities to expand in data-center and mobile-infrastructure chips.

It's true that Xilinx's revenue for the fiscal year ending in March is projected to drop by the most in more than a decade.  But after that, growth should return.  And compared to other recent takeover targets, it's not crazy-expensive, either. Even after its jump on Thursday, Xilinx was trading at about 14.5 times its Ebitda in the last 12 months. Larger semiconductor makers have commanded a median of more than 16 times in the latest deal frenzy, with Altera getting 25 times Ebitda out of Intel.  

Big Spenders

A takeover of Xilinx would rank among the biggest for the chipmaker deal wave -- but also among the cheapest in that group.

Source: Bloomberg

The most frequently speculated buyer is Qualcomm. After the $71 billion chipmaker decided against a breakup encouraged by activist investor Jana Partners, investors shifted their focus to what the company might do with its gigantic cash hoard. Qualcomm has veered more toward joint ventures of late, announcing a radio-chip partnership with Japan's TDK and discussing a medical-technology deal with GlaxoSmithKline. But an acquisition of Xilinx could be a good fit.

M&A smoke doesn't always mean there's fire (see Twitter). But in this case, there's reason to think the semiconductor industry's takeover craze could be headed for one last hurrah.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Brooke Sutherland in New York at bsutherland7@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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