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Infineon Inks Deal to Buy Cypress Semiconductor for 9B Euros

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Infineon Technologies AG (IFNNY - Free Report) recently entered into a definitive agreement to acquire Cypress Semiconductor Corporation (CY - Free Report) for approximately €9 billion (around $10 billion).

Consequently, Cypress’ shareholders will obtain $23.85 per share in cash. This represents approximately 33.8% premium over the $17.82 price on May 31, 2019 after market close.

The primary factor working in favor of the deal is Cypress’ strength in USB devices, automotive NOR Flash memory and microcontrollers, digital and mixed-signal integrated circuits (ICs) and wireless connectivity solutions.

With the buyout, Infineon intends to strategically enhance presence in high-growth markets including IoT, automotive and industrial verticals.

Notably, Infineon stock has declined 8.1% year to date, against the industry’s rally of 6.3%.

Acquisition Facets in Detail

Infineon is a Germany-based company, while Cypress is headquartered in San Jose, CA. The semiconductor stocks in general are bearing the brunt of ongoing U.S.-China trade-war and weakness in macroeconomic conditions.

Although, relationship metrics between the United States and China differ from that of the United States and Europe, uncertainty prevails over the approval of the deal given growing U.S. protectionism.

Denial of Broadcom’s (AVGO - Free Report) Qualcomm acquisition is noteworthy in this regard. Notably, the now U.S.-based Broadcom was headquartered in Singapore previously.

The acquisition is subject to Cypress’ shareholders nod and other customary regulatory approvals. Nevertheless, after fulfilling the regulatory approvals, Infineon anticipates closure by end of 2019 or early 2020.

Analyzing Cash & Debt Position

Infineon ended the second quarter of fiscal 2019 with €809 million in cash & cash equivalents. Total debt (including current portion) as on Mar 31, 2019, was €1.549 billion.

Meanwhile, Cypress reported cash and cash equivalents of $285.1 million and long-term debt (including current portion) of $904.3 million at the end of first-quarter 2019.

It is important to note that Cypress will fulfill its quarterly dividend payment commitments up to the closure of the deal. The company will pay 11 cents per share as dividends on Jul 18, 2019 to shareholders as on Jun 27, 2019.

Markedly, both the acquirer and the to-be-acquired companies are in a net debt position, which is not financially favorable, at least in the near term. However, given the long-term growth prospects, we anticipate the deal to yield higher returns for shareholders on bottom-line expansion.

Infineon notes that the financial backing for the deal is completely “underwritten by a consortium of banks.” In a bid to sustain liquidity, the company will fund the acquisition through 30% of total contract value by equity, and remaining via debt and cash on hand.

Complementary Business Lines to Alleviate Macro Woes

Infineon is expected to accentuate its growth prospects of its Automotive (ATV) Industrial Power Control (IPC) and Power Management & Multimarket (PMM) operating segments with the acquisition.

Cypress’ expertise in connectivity components and microcontrollers is expected to complement Infineon’s proficiency in power semiconductors, security solutions and sensors.

Moreover, Infineon expects to explore new IoT applications pertaining to consumer and industrial verticals on the back of Cypress’ domain expertise in software.

The aforementioned factors are expected to aid Infineon in expanding TAM effectively. Following the buyout, the German chipmaker envisions the acquisition to be accretive to earnings as early as its “first full fiscal year.”

The company anticipates the economies of scale from the buyout to “create cost synergies of €180 million per annum by 2022.”

Infineon estimates the top line to increase by approximately €1.5 billion per annum over the long term. In terms of revenues, Infineon anticipates the deal to position it as the eighth largest chip manufacturing company globally. Per its target operating model, Infineon envisions revenues to grow by 9% and now aims segment result margin of 19% (prior estimate of 17%).

Interestingly, trade war has made it difficult for U.S. based semiconductor companies to do business with companies based in China. We believe that if the deal finalizes, it will somewhat cushion Cypress’ business from the ongoing tariff scenario.

Moreover, Cypress’ products will have a broader reach. This way, the deal presents a win-win situation for both the companies.

Wrapping Up

We anticipate Cypress’ addition to Infineon’s portfolio to aid the acquirer improve fortunes amid ongoing macroeconomic weakness.

Further, the deal marks prevalent consolidation in semiconductor domain. NVIDIA’s (NVDA - Free Report) recent Mellanox acquisition is quintessential in this regard.

Zacks Rank

Infineon carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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