Bigger Isn't Better for Skyworks
What a difference a year makes.
Around this time last November, Skyworks Solutions Inc. bowed out of a heated bidding war for chipmaker PMC-Sierra as the price reached dizzying heights. Now it's reportedly looking at the company that won that takeover battle: Microsemi Corp. If you can't beat them, buy them… for even more money.
Analysts have estimated that Microsemi could fetch around $60 to $70 a share in a sale. Taking the midpoint, Skyworks would be paying roughly $9.5 billion including debt, or more than 5 times the revenue that Microsemi is projected to earn in fiscal 2017 (the first full year with PMC-Sierra). To put that in perspective, Skyworks had decided that Microsemi's bid valuing PMC-Sierra at more than 4 times that company's sales was too rich to top.
It's understandable that a combination of PMC-Sierra and Microsemi would command some kind of premium. Scale has become increasingly important to a semiconductor industry facing rising expenses for ever-more complicated designs. The addition of PMC-Sierra instantly boosted Microsemi's revenue by more than 40 percent, before accounting for any sales synergies that the company might achieve by marketing PMC-Sierra's chips for data centers and wireless infrastructure to Microsemi's existing communications clients. What's less clear is why this deal makes any more sense for Skyworks than the one it had in front of it a year ago.
Like last time, Skyworks will probably have to contend with other bidders. Even after nearly $220 billion of semiconductor takeovers over the past three years, companies are still on the prowl and Microsemi has reportedly engaged financial advisers to run a broader auction.
Skyworks may not have the strongest hand in a bidding war, if it comes to that. One of the reasons that Microsemi was able to offer a higher price for PMC-Sierra was because it saw about $25 million more in annual cost-saving opportunities than the $75 million that Skyworks had outlined. Microsemi still doesn't have much overlap with Skyworks, which means synergies are likely to continue to be muted.
Say the cost benefits came in at a similar level relative to the companies' combined revenue as what was proposed in the PMC-Sierra takeover. Assuming Skyworks had to pay $65 a share to get a Microsemi deal done, those benefits wouldn't be enough to make the purchase accretive to its calendar-year 2017 earnings per share, according to data compiled by Bloomberg.
Cowen analysts are more generous with their estimates, calculating $165 million in operating-expense run-rate savings by the end of 2018. They calculate meaningful earnings accretion with those synergies -- but that's assuming Skyworks offers no more than $57 a share and pays for 40 percent of the purchase with stock. A bid in that range would be nearly $1 billion less than the kind of price analysts think is appropriate for Microsemi.
The appeal of a Microsemi takeover is that it would make Skyworks less dependent on the slowing smartphone market, and more specifically, less tied to the performance of Apple's iPhone. That's a valid reason to do a deal; Apple's revenue has declined for three straight quarters and even with the launch of the iPhone 7, there are signs that the company's new normal will be less super-charged. But things at Apple are far from so dire that a diversifying deal makes sense at any price.
Remember Dialog Semiconductor Plc's bid for Atmel? That deal would have helped the Apple supplier expand into the automotive industry and the Internet of Things, but it was expensive and dilutive to existing shareholders so they hated it. Dialog shares have climbed about 40 percent since Atmel received a superior offer from Microchip Technology Inc. The shares still aren't back to where they were before Dialog pursued Atmel, but they're likely higher than where they would be if the deal had gone through.
So far, Skyworks shareholders aren't running for the hills; the stock is up about 2 percent since Bloomberg News first reported the company's interest in Microsemi last week, but Skyworks also reported better-than-expected earnings in that time. CEO Liam Griffin, who's held the top post for just six months, took pains to reassure shareholders on the company's earnings call last week that it would remain disciplined when it comes to M&A. If he means it, then a deal for Microsemi shouldn't be in the cards.
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