Infineon Sets Up Semtech, Intersil for Windfall: Real M&A

If Infineon Technologies AG’s appetite is any guide, four U.S. semiconductor companies including Semtech Corp. and Intersil Corp. could garner takeover bids that would enrich shareholders by a total of $5 billion.

Shares of Semtech, Intersil, Fairchild Semiconductor International Inc. and ON Semiconductor Corp. rallied yesterday amid speculation they could be the next targets, after Infineon announced it’s acquiring one of their closest peers for an above-average premium of 56 percent. Should those companies fetch the same premium in a takeover, it would create a combined $5 billion windfall for their investors.

Slowing revenue growth in the fragmented market for analog chips is driving deal activity and bets that more transactions will follow. With about $30 billion of semiconductor acquisitions globally in the past 12 months, it’s the busiest period since 2007, according to data compiled by Bloomberg. And as of last month, at least a dozen more chipmakers had held merger discussions this year, people familiar with the companies’ plans said at the time.

“These companies haven’t been able to organically grow to a substantial market share, so the secondary way you can grow share is by M&A,” Anand Srinivasan, a New York-based analyst for Bloomberg Intelligence, said in a phone interview. “We’ve been starting to see that over the last few quarters in this space.”

Representatives for Camarillo, California-based Semtech; San Jose, California-based Fairchild; Milpitas, California-based Intersil; and Phoenix-based ON Semiconductor didn’t respond to phone calls or e-mails seeking comment.

Infineon’s Offer

Infineon, Germany’s largest chipmaker, agreed yesterday to buy International Rectifier Corp. for about $3 billion in cash to add to its power-management technology business. International Rectifier makes so-called analog chips that help manage power flow in devices including washing machines, cars and satellites.

Infineon is paying a “steep” price than can be justified if it’s able to boost International Rectifier’s margins, Janardan Menon, an analyst at Liberum Capital Ltd., wrote in a report yesterday.

The $40-a-share offer is 56 percent higher than International Rectifier’s average share price in the 20 trading days through Aug. 19. In the past five years, buyers have paid a 35 percent premium on average for semiconductor companies, according to data compiled by Bloomberg based on deals larger than $1 billion.

Recent Interest

Acquirers have been particularly active in the industry over the past 12 months. Avago Technologies Ltd. bought LSI Corp. for about $6 billion, Applied Materials Inc. announced a similar-sized purchase of Tokyo Electron Ltd., RF Micro Devices Inc. agreed to acquire TriQuint Semiconductor Inc. for about $1.5 billion, and Intel Corp. said last week that it’s buying Avago’s Axxia business for $650 million.

“There’s more consolidation to come,” Kevin Cassidy, a Washington-based analyst for Stifel Financial Corp., said in a phone interview. “Mid-sized companies would probably be the target candidates. Somebody in the $2 billion market cap range.”

Semtech, Fairchild, Intersil and ON Semiconductor are International Rectifier’s four most similar peers in both size and the types of chips they produce, Srinivasan said. The four companies have an average market valuation of $2.4 billion.

Fairchild and Intersil both rose more than 4 percent yesterday, while Semtech gained 2.7 percent, the most in almost a month, and ON Semiconductor added 1.7 percent.

Today, Fairchild gained 0.5 percent to $16.81, and Intersil advanced 0.8 percent to $14.05. Semtech rallied 4.8 percent to $25.15, while ON climbed 2.6 percent to $9.44.

Value Creation

Based on their average stock prices leading up to the International Rectifier deal, those four companies had a combined value of about $9 billion. If each were to receive takeover offers for a 56 percent premium like International Rectifier just did, it would create $5 billion in shareholder value, though there’s no guarantee any will get bids.

Analog semiconductors play a large role in power-related innovations that consumers value, such as longer battery life for mobile phones and more efficient washing machines, Cassidy said.

“Power management is everywhere,” Srinivasan of Bloomberg Intelligence said. “Analog chips are one of those ubiquitous products because all electronics and electrical equipment have power chips of some sort.”

Buying up other manufacturers is “the only way you’re going to cobble together a grand company that is exposed to analog in a substantial way,” he said.

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