Shareholders of leading semiconductor manufacturer TriQuint Semiconductor, Inc. (TQNT) and rival RF Micro Devices Inc. (RFMD) have recently approved the merger of the respective entities to form a behemoth in the semiconductor manufacturing industry. The all-stock transaction, valued at approximately $1.6 billion, is termed as a merger of equals. The deal, announced in February this year, is likely to be completed by the second half of 2014, subject to the fulfillment of mandatory closing conditions and regulatory approvals.
The combined entity will bring under a common platform all the critical radio frequency (RF) components that are essential for fabricating mobile devices, thereby creating an undisputed market leader with a diversified product portfolio. These include power amplifiers (PAs), power management integrated circuits (PMICs), antenna control solutions, switch-based products and premium filters.
This in turn will likely offer better bargaining power and make it harder for customers such as Apple Inc. (AAPL) and Samsung Electronics Co. Ltd. (SSNLF) to negotiate on pricing. With global smartphone users predicted to triple to 5.6 billion by 2019, the merger provides a huge revenue-generating potential to the new entity.
At the same time, the merger strengthens the combined company's ability to better serve the infrastructure and defense/aerospace industries with advanced gallium nitride (GaN) solutions for additional markets and applications, and foundry services to support radar, next generation base stations, optical communications, and the Internet of Things. The newly formed entity is also expected to be a leading player in this sphere.
In addition, the merger will offer synergistic benefits and increase the profitability of the new company through economies of scale and mutual sharing of manufacturing expertise, research and development costs and adjustment of staffing expenses. The transaction is expected to generate $75 million of cost savings in the first year of its operation, followed by another $75 million in the second year. Post- merger, the deal is also expected to be accretive to non-GAAP earnings in the first full fiscal year of its operation.
With a broad product portfolio and improved operating model, the merger is likely to create new growth opportunities in three large global markets, namely, mobile devices, network infrastructure and aerospace/defense. The merger is expected to benefit the overall industry as well with technological innovations leveraging on a huge talent pool and combined resources. The combination will also offer higher data throughput for the overall benefit of carriers and consumers alike.
The merger is likely to lead to further industry consolidation with pricing becoming more rational. While TriQuint presently has a Zacks Rank #1 (Strong Buy), RF Micro has a Zacks Rank #2 (Buy).
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