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Synaptics (SYNA) Scoops Up Broadcom's IoT Unit in $250M Deal

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Synaptics Incorporated (SYNA - Free Report) recently inked a definitive agreement to acquire Broadcom’s (AVGO - Free Report) IoT business for $250 million. Per the agreement, Synaptics will also gain manufacturing rights to Broadcom’s wireless IoT products and certain rights to its Wi-Fi, Bluetooth and GPS/GNSS products.

The deal is expected to close during Synaptics’ first-quarter fiscal 2021. The acquisition is likely to be immediately accretive to the company’s non-GAAP gross margin and earnings per share as soon as it closes. The buyout is also expected to bring in an additional $65 million of revenues during the current fiscal and has significant revenue growth potential over the long run.

Synaptics is expected to use its existing cash balances to fund the transaction. As of Mar 31, the company had cash and cash equivalents of $472 million. Additionally, Synaptics divested its mobile LCD TDDI business in April, strengthening its P&L and balance sheet and positioning it better to invest in acquisitions to expand the portfolio.

Rationale Behind the Move

Synaptics derives a significant portion of revenues from its existing IoT business. Notably, it expects IoT to contribute 23% of total revenues in fourth-quarter fiscal 2020.

In its last earnings call, Synaptics mentioned that its IoT business has been affected by the coronavirus-related demand disruptions, as discretionary spending on consumer electronics and automotive declined significantly. Nevertheless, the company’s solid prospects in the edge SoC, including the solid traction of its VS600 Smart Edge AI family of SoCs, was a saving grace. It further expects the IoT business to decline around 12% sequentially in the fourth quarter of fiscal 2020 due to continued market pressures.

Amid these dynamics, the acquisition of Broadcom’s strong IoT business comes as a welcome move. It is expected to boost Synaptics’ presence in the fast-growing consumer IoT market and revive its own IoT business. Per Mordor Intelligence, the global IoT market is expected to hit $1256.1 billion by 2025, witnessing a CAGR of 10.53% during 2020-2025.

Michael Hurlston, president and CEO, Synaptics, said, “This acquisition complements Synaptics’ ability to sell into a broad range of devices such as IP cameras, smart displays, speakers, home automation, and gaming consoles — all of which require cutting-edge technologies including Wi-Fi 6 and 6E, Bluetooth 5.2 and GPS L5.”

Zacks Rank & Other Key Picks

Synaptics currently has a Zacks Rank #2 (Buy).

A couple of other top-ranked stocks are Fortinet, Inc. (FTNT - Free Report) and Baozun Inc. (BZUN - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Fortinet and Baozun is currently pegged at 14% and 29%, respectively.

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