How Will the Microsemi-PMC Merger Turn Out for Investors?
Semiconductors: The Impact of an Acquisition and 4Q15 Earnings
Investors react to Microsemi-PMC merger
In the previous part of this series, we saw that Microsemi (MSCC) won the battle with Skyworks Solutions (SWKS), acquiring PMC-Sierra (PMCS) for a 77% premium. The deal is not subject to approval by Microsemi shareholders, who do not seem to have taken the deal well. The company’s stocks fell all three times Microsemi placed an offer. Let’s see what opportunities and risks the Microsemi-PMC merger may bring.
Opportunities from the merger
Microsemi supplies semiconductors for communications, defense, security, aerospace, and industrial markets. The company also offers software solutions for cloud data. With the acquisition of PMC-Sierra, the company aims to offer storage solutions for data center and cloud applications. Even traditional IT (information technology) companies such as Intel (INTC) are venturing into the high-growth data center and cloud space to boost revenue.
Microsemi expects the merger to bring in over $100 million in annual savings, with over $75 million of these savings expected to come in the first full quarter after the deal is closed in 1Q16. It also expects the merger to bring non-GAAP (generally accepted accounting principles) EPS (earnings per share) accretion of ~$0.60 in the first full year after the deal is closed.
Risks associated with the merger
The first year cost synergies would be partially offset by the $88.5 million termination fee PMC-Sierra will have to pay to Skyworks Solutions. Moreover, Microsemi plans to fund the ~$2.5 billion merger and repay its existing $953.9 million credit facility through a combination of its existing cash reserves of $256.4 million, new debt of $2.7 billion, and equity of $600 million. This funding structure will result in the combined company having high leverage.
What made Microsemi outbid Skyworks?
Microsemi has been eyeing PMC-Sierra for product synergies in the storage space. The former was optimistic that its combination with the latter would bring in benefits arising from a larger scale, higher profit margins, cost savings and exposure to a diversified customer base.
Conversely, for Skyworks, the acquisition of PMC-Sierra was a part of its strategy to diversify its portfolio. In the next part of this series, we’ll discuss why Skyworks backed out from the merger bid. The Technology Select Sector SPDR ETF (XLK) has a 0.35% exposure to Skyworks.
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