Supertex an Acquisition Target?

Highlights include MicroChip Inc. (MCHP - Analyst Report), Supertex, Inc. (SUPX - Snapshot Report) and Atmel Corp. (ATML - Analyst Report).

MicroChip Inc. (MCHP - Analyst Report, Hold) recently announced that it has increased its stake in Supertex, Inc. (SUPX - Snapshot Report, Hold).

As disclosed in a 13-D filing on March 9, MCHP indicated that it has increased its common stock ownership in SUPX to 6.1% vs. 5.4% previously due to the exercise of put options sold short. The company still maintains a significant short put option position, if fully exercised, would take the company’s stock ownership position in SUPX to 12.2%.

The remaining options expire in two lots: Mar 2009 and Jan 2010, and are struck at $22.50 and $25. At the end of March 2009, further option exercises would take MCHP’s ownership position up to 9.2%.

This comes in the wake of a recent bid by MCHP for Atmel (ATML - Analyst Report, Hold), which was turned down by the Board of ATML. The recent 13-D filing may indicate that MCHP is still in an acquisition mode.

However, as in the case of ATML, valuation of SUPX would be in question, as we think it already trades at the higher end of the valuation range of its peer group, i.e., 1.4 – 2.0 times EV/Sales. A potential bid from MCHP would have to be in the 2.5-3.0x EV/Sales range, which would suggest an acquisition price of $24-$26/share.

Although it would be a substantial premium to the $5 bid by MCHP for ATML (approx. 1.5x EV/Sales), the potential takeout valuation of SUPX would only offer a slight premium to current valuations and may not be attractive enough to SUPX management, mainly due to the lack of synergies between to the two companies. Although it is too early to make a call, we think that MCHP’s increased stake could be a harbinger of a takeout proposition.

Shares of SUPX have gained 30.6% since the week of March 9. We currently have a Hold rating on the stock.