Dialog Semiconductor PLC said it will pay approximately $4.6 billion for Atmel Corp. to further deepen relationship with the world’s leading mobile phone manufacturers and simultaneously diversify its revenue base to attract new customers in the fast-growing market for connected devices, or Internet of Things, (IoT), and the automotive industry.
The combination of the two companies is expected to create a nearly $3 billion revenue company with a wider range of product offerings, including power management ICs, microcontrollers, connectivity and security for the IoT market. Dialog estimates its addressable market at approximately $20 billion by 2019 and said in a statement that it sees additional revenue growth opportunities in other segments of the electronics industry.
With the transaction Dialog aims to address one of the major challenges facing the U.K.-based chipmaker, which analysts said is heavily dependent upon the wireless equipment market for more than 80 percent of its revenue. They especially note the company’s reliance on Apple Inc. for more than three-quarters of its annual revenue despite strong efforts by Dialog in the last years to expand sales into other segments of the electronics industry. By buying Atmel, the company could finally push into new markets and reduce its reliance on wireless OEMs, according to the management.
“By bringing together our technologies, world-class talent and broad distribution channels we will create a new, powerful force in the semiconductor space,” said Jalal Bagherli, CEO of Dialog in a statement. “Our new, enlarged company will be a diversified, high-growth market leader in mobile power, IoT and automotive. We firmly believe that by combining power management, microcontrollers, connectivity and security technologies, we will create a strong platform for innovation and growth in the large and attractive market segments we serve.”
Industry observers had been expecting Dialog to intensify steps to diversify its revenue base as the company’s dependence on smartphone manufacturers for a majority of its revenue had grown in recent years. It has targeted opportunities in the IoT market and added other segments of the electronics industry such as wearable devices and the smart home. In the last year, the company partnered with MediaTek in China and successfully added Lenovo and Meizu to its customer roster and said it sees additional growth opportunities in the Chinese market.
Dialog remains heavily reliant on a handful of customers for a majority of its revenue despite the diversification program. In 2014, for example, a group of five companies – Apple, Panasonic, Samsung, Bosch and Gigaset – accounted for nearly 90 percent of its revenue of $1.2 billion, which rose 28 percent from $901.4 million in 2013.
Analysts believe Apple alone represents the largest chunk of Dialog’s revenue and said this is likely to keep on rising as the consumer electronics OEM continues to outperform competitors in the smartphone market. A decline in Apple’s sales could therefore be devastating for Dialog, hence moves by the company to diversify its sales into other markets. Estimates from Dialog itself indicates Apple contributed $909.9 million of its 2014 sales, or nearly 76 percent of the total.
In the previous year, Apple contributed $718.7 million to Dialog’s sales. In total, customers in the mobile systems market were responsible in 2014 for 81.5 percent of Dialog’s sales, down slightly from 82.5 percent in 2013. A large chunk of the remaining revenue came from the automotive industry, the company noted in its annual report.
“We recognize there is a risk associated with this level of customer concentration,” the company said in its 2014 annual report. “The diversification of our business is a key strategic objective. The Group depends on a relatively small number of customers for a substantial portion of its revenues, and the loss of one or more of these customers may result in a significant decline in future revenue.”
The proposed acquisition of Atmel should help the company accelerate the revenue diversification program. However, investors didn’t seem too happy with the transaction. Dialog’s stock price tumbled more than 20 percent in early trading on Monday as shareholders fret over the terms of the transaction. Observers believe they may be concerned about the $2.1 billion in loans from Morgan Stanley Senior Funding Inc. that Dialog will be assuming to fund the transaction.
They could also be worried that the company may be overpaying for Atmel. Under the terms of the transaction, Dialog will pay approximately $10.42 in cash and Dialog’s American Depository Share to assume control of Atmel. The companies estimated the face cost of the transaction at $4.6 billion, or approximately $4.4 billion in enterprise value after deducting the $200 million in cash on Atmel’s balance sheet.
“Post transaction, it is projected that Atmel shareholders will own approximately 38 percent of the combined company,” Dialog said in its statement. “The transaction would result in a capital structure with leverage of approximately 3x Net Debt/Estimated LTM EBITDA at closing.”
Speculations about a possible sale of Atmel had grown following a statement from the company last month that the previously announced retirement of CEO Steven Laub had been extended “to facilitate the completion of an ongoing strategic evaluation process.”
The company has in recent years struggled to expand sales following a sharp drop in revenue in 2012. It reported sales of $1.41 billion 2012, up 2 percent from $1.37 billion in 2013. Analysts on average were forecasting a decline in Atmel’s 2015 sales, to $1.22 billion in 2015, down nearly 14 percent from 2014, and predicted a slight uptick in 2016 to $1.27 billion, up 4 percent.
The offer from Dialog was considered highly positive for the company. Its stock price rose more than 16 percent in pre-trading on the NASDAQ market to $8.46 from the previous close of $7.27 on Friday, September 18.
The companies said they expect the transaction to close in the first quarter of 2016.