Microchip Technology Inc. acquires Standard Microsystems and Roving Networks

Microchip Technology Inc. (NASDAQ:MCHP) has executed substantial moves in the semiconductors industry over the past few weeks, most recently with their $939 million acquisition of Standard Microsystems Corp. (NASDAQ:SMSC). Preceding this agreement with Standard Microsystems by mere weeks, Microchip Technology also acquired Los Gatos, California-based Roving Networks, a privately held innovator and semiconductor developer of WiFi and Bluetooth transceivers and modules. The consolidation strategy on the part of MCHP is likely founded in a variety of potential advantages, but ultimately it boils down to the fact that integration through acquisition is just plain faster than organic growth. In a market segment growing as fast as wireless semiconductors, the old saying that time is money is acutely accurate, MCHP recognizes the value in keeping ahead of ever-evolving wireless technology.

With a price tag that nearly rounds itself up to a billion dollars, the SMSC acquisition justifies some serious media attention. Looking at the numbers alone, the enterprise worth of about $766 million is somewhat smaller in scale than the overall agreement price, as SMSC brings close to $173 million of cash and investments to the table with no debt to water it down. The buyout resulted in a selling price per share of $37, around $10 above SMSC’s average trading prices the prior week.  Pending regulatory and SMSC stockholder approval, this deal is expected to finalize in Q3 2012.

CEO and President of MCHP, Steve Sanghi, delivered a conference call on May 2nd, 2012 with the intent of providing an overview of the SMSC acquisition and the subsequent strategic reasoning behind it.  “SMSC has a rich portfolio of mixed signal IP and building blocks that we believe are synergistic with our high-performance microcontrollers. SMSC also adds a strong IP portfolio to Microchip with over 300 issued patents and about 100 pending patents.” Mr. Sanghi’s above analysis of the value added through the acquisition is further evidenced by SMSC’s fiscal year non-GAAP operating profit of 12% alongside net sales of $412 million (a non-GAAP growth margin upwards of 54%), the aforementioned fiscal year ending February 29th, 2012.  The 2012 numbers, when combined with the extensive IP portfolio, demonstrate a strong potential for growth if well integrated.

From a less numerical perspective, SMSC hosts an impressive spectrum of analog and interface IP in their portfolio, most notably within (but not limited to) I/O controllers, wireless audio, and automotive. Through this move MCHP significantly expands their reach through integrating their microcontrollers (uC) with these interfaces, adding value that would have otherwise been difficult to achieve organically. This risk lies in the effectiveness of the integration, and the success of this move will be largely dependent upon how different designs and manufacturing processes can be streamlined.

With the SMSC deal in the forefront it’s easy to overlook the acquisition of Roving Networks, which managed to stay much more under the radar. Roving Networks displays a formidable competitive advantage through their highly developed Bluetooth and WiFi IP, meanwhile MCHP has Zigbee. When taking these two strengths together, Microchip has effectively covered all the bases through pursuing a strong presence in the three dominant platforms in wireless connectivity.  When viewed from this angle, the strategic attractiveness of Roving Networks to Microchip is in competing across all three wireless standards in order to grow more competitive in an increasingly vital wireless segment of the semiconductor market.

Bottom Line

With SMSC’s extensive IP and Roving Networks’ edge in Wi-Fi and Bluetooth applications, MCHP has the potential to leverage size along with their highly developed microcontrollers to optimize their product line and potential reach, ideally capturing a more substantial share of a critical market segment. This is all assuming that these different entities can achieve interdependence through effectively integrating under one name, which time tells us is rarely easy. The natural hurdles that come with the territory of acquisitions are always a significant risk, but with those concerns pushed to the sideline there is a distinct opportunity here for Microchip Technology to attain a critical edge and powerful position in the consistently growing consumer wireless markets.