Atmel (ATML), Lattice Semi (LSCC) and Cavium (CAVM) Seen as Top Three Remaining M&A Targets in Semi Sector, FBR Capital Says

June 4, 2015 7:40 AM EDT
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FBR Capital analyst Christopher Rolland commented on the state of M&A in the semiconductor space. Rolland notes if we continue at the pace of consolidation set thus far this year, 32% of all U.S. publically traded semiconductor companies will be acquired in 2015. He said while this rate run-rate is likely not sustainable they above-average rates of consolidation for the remainder of this cycle.

Rolland highlighted a number of potential targets in the wave of consolidation:

Top takeout candidate No. 1, Atmel (NASDAQ: ATML) (OP, $10 price target), remains our favorite 2015 buyout candidate. (FBR estimates the chance of a takeout in the next 12 months as ~25%.) In our view, Atmel has an excellent MCU product portfolio with just two architectures (AVR and ARM), thus is less R&D intensive and therefore a more favorable MCU acquisition candidate. ATML has one of the oldest and most inefficient fabs globally, which, we believe, offers excellent gross margin accretion for those with modern manufacturing capacity. On FBR’s Accretion Index, ATML ranked in the top third of financially accretive companies, with 61% higher EPS once synergies are realized. (In our bull-case scenario, EPS were 109% higher!) Top suitors could include TXN, MCHP, QCOM, NVDA, AVGO, NXPI, IFX.

Top takeout candidate No. 2: Lattice Semiconductor (NASDAQ: LSCC) OP, $8.00 price target); 12-month takeout probability above 20%. Lattice ranked in the top third of financially accretive companies with 59% higher EPS, once synergies are realized (85% higher EPS in our bull case). Lattice also offers acquirers an incredibly high 11%, approximately, ROI after financing interest. Strategically, Lattice offers acquirers a full range of display technologies (HDMI 1.0/2.0, MHL, WiGig), USB 3.1 options and, most importantly, a level of programmability or hardware acceleration for processor offerings (a main reason Intel acquired Altera). Finally, Lattice is one of the most inexpensive companies in our universe. Top suitors could include MSCC, XLNX, INTC/ALTR, QCOM, MRVL.

Top takeout candidate No. 3: Cavium (NASDAQ: CAVM) OP, $80 PT); 12-month takeout probability greater than 15%. While Cavium did not screen particularly well in our Accretion Index, the company’s products are highly strategic for a large compute and/or networking acquirer. Indeed, Cavium’s product line would be extremely valuable for HP, who is looking to provide alternative compute and networking architectures to those of Intel and Cisco. An acquisition of Cavium could also jump-start QCOM’s ambitions to become a player in ARM-based servers. (We understand QCOM’s products are not expected to come to market until 2017, or beyond.) Finally, Cavium could be an excellent source for Cisco’s next-generation products, as the company is already a high-teens customer. Top suitors could include INTC, QCOM, CSCO, HPQ, AVGO, MRVL.

Runners-up include AMCC, MRVL, and ARMH. Potential suitors include QCOM/HPQ/CSCO for AMCC; Apple/QCOM for ARMH; the Chinese government/Lenovo/Datang for Marvell.

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