Chip Deals Pass Their Prime
After nearly $200 billion of semiconductor takeovers over the last three years, are we moving into overdone territory?
Another tie-up was added to the list on Tuesday when Japanese chipmaker Renesas announced it was buying U.S. counterpart Intersil in a transaction valued at about $3 billion after subtracting net cash. While Intersil has been speculated as a potential target since 2011, the deal that will finally take it off the market is in many ways the epitome of what you'd expect to see toward the end of an M&A wave.
Yes, Intersil does have strategic appeal for Renesas. The company's power-management chips, along with its analog semiconductors that convert touch and sound into electronic signals, will help its Japanese acquirer round out its offerings for the increasingly high-tech automotive and industrial sectors. But this is no bargain -- and the deal comes with a hefty amount of risk, in terms of both regulatory hurdles to overcome and potential integration issues.
Renesas points to Aug. 19 as a benchmark for Intersil's unaffected price; that's the last trading day before reports surfaced about a deal between the two companies. But really, takeover speculation had been baked into Intersil's stock before then, particularly in light of Analog Devices's July agreement to buy Intersil competitor Linear Technology for about $13 billion. Relative to Intersil's stock price before the Linear buyout, Renesas's offer amounts to an almost 60 percent premium -- versus the 44 percent that's billed in the press release.
The price tag works out to more than 25 times Intersil's projected 2016 Ebitda. That's not the most expensive semiconductor deal, but it's up there. The median Ebitda multiple paid for similar-sized takeovers during this latest deal flurry was around 18. Buying growth is expensive when you come late to the M&A party and have to compete with all the other tardy arrivals. Indeed, Renesas was upfront about the fact that competing bids pushed up the price it had to pay.
The Japanese chipmaker says the deal will be accretive to non-GAAP earnings per share immediately after it closes, but it's not clear by how much. Prior to Tuesday's announcement, Takeo Miyamoto, an analyst at Mitsubishi UFJ Morgan Stanley Securities, warned that an acquisition of Intersil in the range of $3 billion would do little to boost profits and could lead to significant impairment losses if the execution wasn't perfect. The $170 million of synergies that Renesas is targeting for the deal could in theory help the purchase pay off. But a large portion of the benefits are tied to revenue expansion, which is historically harder to achieve and predict than cost savings. Perhaps that's why Renesas CEO Bunsei Kure said that it will take "four to five years to realize the full extent of synergies."
Four to five years? This has got to make Renesas shareholders at least a little nervous. Not to mention that this deal bears a non-negligible amount of antitrust risk. As my colleague Tim Culpan noted, Intersil's role as a supplier to the military and aerospace industries and Renesas's ties to the Japanese government should raise questions at the Committee on Foreign Investment in the U.S., which is charged with assessing the national security risk of overseas takeovers.
It's not a good sign when your takeover is considered to have set a new low bar for what makes a justifiable acquisition target, as MKM analyst Ian Ing suggested on Tuesday. It all smacks of the end of a cycle, if not a bit of desperation.
That's not to say there won't be more semiconductor deals. But the logic is getting increasingly stretched.
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