Maxim Integrated to Acquire Volterra Semiconductor for $23 Per Share

Maxim Integrated announced this week that it will acquire Volterra Semiconductor for $23 per share or $605 million in total (or $450 million after excluding Volterra’s cash on hand). Analyst’s initial take is that the deal will be made at a reasonable, but not especially cheap, valuation, but it does allow Maxim to expand into the server power management chip business and the acquisition of a strong engineering team may pay off for Maxim in terms of development of new analog products sold into cloud computing and solar/energy end markets in the long-term.

Volterra is a leading analog power management chip supplier with particular concentration in the server and storage end markets, counting IBM and HP as key customers. Maxim has little organic server exposure, but in addition to entering this end market, the firm hopes to extend Volterra’s small communications chip business to new customers as well. Meanwhile, a third of Volterra’s sales in 2012 were made to PC notebook makers, but Volterra (similar to Maxim in prior years) is de-emphasizing the highly competitive PC power management chip business and previously forecast that PC chip sales will be about 20% of total revenue in 2013.

At $23 per share, Maxim’s definitive offer represents a 55% premium on Volterra’s stock price, which we think is a reasonable premium for a chip acquisition, and we should note that Volterra traded in this range as recently as a year ago. However, the deal isn’t particularly cheap either as it represents a price/earnings ratio of 31 times, based on Street estimates for Volterra’s 2013 earnings. Maxim expects the deal to be accretive right away (excluding onetime costs) and the deal should close in October. All in all, we think Maxim acquired a talented analog design team and diversified into new end markets, which we think might be a welcome move for investors, in light of Maxim’s increasingly high exposure to Samsung in mobile power management chips that paid off well in prior quarters but suddenly flipped into a strong headwind against near-term sales.

From a financial perspective, Volterra’s revenue over the past 12 months of $157 million would only make up 6% of Maxim’s total sales, so the acquisition isn’t an earthshattering move, in our opinion. We’re encouraged by Volterra’s relatively strong profitability, as gross margins in the high 50% range are only modestly dilutive to Maxim’s corporate average, and we’re pleased to see that Maxim maintained its long-term operating targets of 61%-64% gross margins and 30%-plus operating margins.

Yet in addition to the deal being accretive right away, $15 million in annual operating expense synergies should improve Volterra’s profitability even further, perhaps offsetting its recent drop in earnings due to exiting the PC business and, in turn, justifying the premium paid in the deal. Maxim plans to fund the deal with cash on hand, but will boost its cash cushion with debt later, and the firm hinted that it expects to lessen its share repurchases in the near term.


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