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Infineon/International Rectifier (IRF) Seen as Harbinger for More Semi Deals

August 21, 2014 8:45 AM EDT
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A number of analysts are out discussing additional consolidation in the semiconductor space in the wake of Infineon Technologies' (OTC: IFNNY) $3 billion deal to acquire International Rectifier (NYSE: IRF), a 51% premium to the prior day's close.

FBR Capital analyst Christopher Rolland sees four main reasons for consolidation in the space: (1) the benefits from consolidating outdated manufacturing operations into a more modern cost-effective platform; (2) elimination of a redundant direct sales force as well as upper level management; (3) the potential to roll up in niche market segments to allow for more stable pricing and margins; and (4) the potential to reduce U.S. taxes, among the highest corporate tax rates globally, which are structured under a "worldwide" tax system.

Rolland said two stocks that they cover that are potential takeover candidates in the space are: Atmel Corporation (NASDAQ: ATML) and Fairchild Semiconductor(NYSE: FCS). The analyst notes both are subscale and could provide numerous synergies related to the four points outlined above.

The analyst notes Fairchild Semiconductor and International Rectifier's daily stock price movements tend to be highly correlated (as high as 0.76). "While FCS has lacked some of IRF’s product-specific drivers (e.g., Grantley), the company plays in most of the same end markets (excluding white box appliances, auto, and general discretes)," the analyst notes. "That said, FCS does not have Gallium Nitride and has much more idle capacity than IRF. Therefore, if an acquirer is in need of additional capacity, we think FCS could possibly provide an excellent acquisition target (the company’s Korea fab is only half full)."

On Atmel, the analyst notes an excellent MCU product portfolio. He added, "Additionally, the company has increasingly moved to a fab-lite model, while its Colorado fab runs extremely full and only has a three-year remaining shelf life. Furthermore, lead times have expanded dramatically in 2014. For companies with a world class sales team and extra manufacturing capacity (Texas Instruments (NYSE: TXN) comes to mind), we think Atmel would make sense as a possible acquisition candidate."

Analyst Doug Freedman of RBC Capital Market, while not getting into specifics, said the Infineon/International Rectifier deal "demonstrates that semiconductor stocks continue to be undervalued especially in the $3bil market cap and below segment of the sector." He added, "When semiconductor acquirers can pay 50% premiums and still be accretive to forward earnings, we think it indicates that the industry deserves to be trading at higher multiples (we like P/FCF ex-cash)..." His top picks in the sector is Marvell Technology Group (Nasdaq: MRVL) and the analyst also witnessed Semtech (Nasdaq: SMTC) trade up after the close despite posting a lower than street guidance. "in our view, this again highlights that the sector remains valuation attractive to new money, post integration of negative news," he said.

In addition to the names mentioned above, other potential takeover targets in the sector include: Power Integrations Inc. (Nasdaq: POWI), Diodes, Inc. (Nasdaq: DIOD), Microsemi Corp (Nasdaq: MSCC), Integrated Device Technology (Nasdaq: IDTI), Intersil Corp (Nasdaq: ISIL), Silicon Laboratories, Inc. (Nasdaq: SLAB), and Monolithic Power Systems, Inc. (Nasdaq: MPWR).



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