Chipmaker Cavium Plunges After $1.36 Billion Deal to Buy QLogicby and
Some analysts puzzled by timing, logic of the acquisition
Cavium decline is biggest intraday drop in eight years
Cavium Inc. fell the most in more than eight years Thursday after the maker of computer network chips said it will buy QLogic Corp. in a cash-and-stock deal valued at about $1.36 billion.
At least four analysts downgraded the stock. Some said they were confused about the timing and rationale for the purchase.
“With significant new product ramps coming...and core growth opportunities remaining at Cisco, it remains unclear to us why the acquisition of QLogic is necessary,” John Vinh, an analyst at Pacific Crest Securities, wrote in a note. He downgraded the stock to sector weight, the equivalent of hold.
Cavium plunged as much as 18 percent, the most intraday since February 2008, to $39.58. It was down 16 percent to $40.24 at 10:52 a.m. in New York and 27 percent this year through Wednesday, before news of the deal was released. QLogic rose 10 percent to $14.85.
“We struggle to see the strategic rationale and see it as growth/margin dilutive for at least the intermediate term,” Rick Schafer, an analyst at Oppenheimer & Co., wrote. “We’re further puzzled by the timing of the deal with Cavium shares 25 percent off April highs. QLogic is a slow-growth asset at best.”
Cavium will pay $15.50 a share for QLogic, consisting of $11 in cash and 0.098 of a share of Cavium stock, the San Jose, California-based company said Wednesday in a statement. The total valuation includes QLogic’s $355 million in cash. The two companies boards have approved the transaction, according to the statement.
The combined company will be able to offer a more diverse set of components to makers of machinery used in data centers, Cavium said. Chipmakers and component vendors are increasingly getting together to try to build scale that will help them deal with rising costs of new product development and a narrowing customer base.
In its most recent fiscal year, Aliso Viejo, California-based QLogic had $458.9 million in revenue compared with $412.7 million at its new owner. Cavium is predicting QLogic will add as much as 70 cents a share to its earnings in calendar year 2017 with $45 million in costs saved in that time frame.
Cavium is paying for the acquisition with $220 million in cash on hand, $650 million of loans, $100 million in a short-term bridge loan and $400 million of new shares.