Earlier this week, the battle between Microsemi MSCC and Skyworks Solutions SWKS to acquire PMC-Sierra PMCS came to an end.
On Tuesday, PMC-Sierra accepted Microsemi’s third revised cash-stock offer of about $2.5 billion, after Skyworks walked away from the bidding war.
Skyworks did not revise its bidding price as it believes that PMC-Sierra is not a financially viable takeover at such a high value. Further, the company will receive $88.5 million as termination fee from PMC-Sierra.
The current deal values PMC-Sierra’s shares at a 77% premium on the closing price as on Sep 30, 2015, when it agreed to consider the merger.
The Deal
Microsemi agreed to offer $12.05 for each PMC-Sierra share, which includes $9.22 in cash and $2.83 as shares. The deal has been approved by the boards at both the companies and does not require the approval of Microsemi shareholders.
Also, once the transaction is concluded in the first quarter of 2016, Microsemi shareholders will hold 85% stake in the combined company with PMC-Sierra stakeholders owning the rest.
Merger Synergies
With the PMC-Sierra acquisition, Microsemi seeks to provide storage solutions for data center and cloud applications while adding a complementary portfolio of high-value communications products.
According to Centaur Partners, Software-as-a-Service (SaaS) and cloud-based business applications are likely to grow from $13.5 billion in 2013 to $32.8 billion in 2016, reflecting a compounded annual growth rate (CAGR) of 19.5%. Moreover, Computerworld forecasts that 42% of IT decision makers are planning to increase spending on cloud computing in 2015.
Microsemi also expects to save in excess of $100 million annually from this merger, with more than $75 million to be realized in the first full quarter following the deal closure.
Also, it expects the merger to bring non-GAAP earnings accretion of 60 cents in the first full year post the closure of the deal.
Risks
For the first year, the cost synergies generated by the merger will be partly offset by the termination fee that PMC-Sierra has to pay Skyworks.
Furthermore, Microsemi intends to finance the $2.5 billion merger and pay off its existing $953.9 million credit facility using a combination of its existing cash reserves of $256.4 million, new debt of $2.7 billion and equity of $600 million.
This funding arrangement will offer high leverage to the merged company.
Shares React
This deal was initially not received well by Microsemi shareholders, as the shares plunged 6.5%.
However, Microsemi jumped 5.20% to $35.63 backed by heavy trading volume on Wednesday, a day after the announcement.
Microsemi currently has a Zacks Rank #3 (Hold).
Investors may consider Amazon.com AMZN instead, carrying a Zacks Rank #2 (Buy).
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