SWKS acquires PMC Sierra

http://seekingalpha.com/pr/14888306-skyworks-to-acquire-pmc-…

-Creates an End-to-End Connectivity, Internet Infrastructure and Hyperscale Data Center Market Leader

-Facilitates Client to Cloud Communications and Universal Access via Wireless or Wireline Networks

-Immediately Accretive to Non-GAAP Earnings Upon Close

-$75 Million of Annual Cost Synergies Targeted within 12 Months, Adding $0.75 of Earnings Power on an Annual Non-GAAP Basis

-Skyworks Expects Q4 FY15 Results to be Better Than Guidance

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confirms above
http://fortune.com/2015/10/06/skyworks-buys-pmcsierra/?xid=y…

In a conference call discussing the deal, David Aldrich the CEO of Skyworks, explained that for a certain level of customer, Skyworks can’t even get in the door without a certain level of size and scale, so this deal helps them enter those markets. With PMC, the new market opportunities are primarily in found in the data center where PMC provides chips for storage and networking gear to companies that build out massive data centers known as hyper scale data centers

Market doesn’t like it based on stock drop. Opprotunity?

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In a conference call discussing the deal, David Aldrich the CEO of Skyworks, explained that for a certain level of customer, Skyworks can’t even get in the door without a certain level of size and scale, so this deal helps them enter those markets.

I wasn’t able to hear the call this morning so I don’t know the context and the tone used by Aldrich when he made the above statement. My initial reaction to the above statement, though, is that it makes no sense. SWKS is a $16B market cap company before the acquisition. They have Apple, the largest company in the world by market cap. They are supplying Apple with parts for 200 million phones per year. SWKS is not exactly a small company and it is already supplying very demanding customers. Is Aldrich saying that for some markets they lack scale? That customers are concerned that SWKS’s factories would be constrained in reliably making parts for them? Are there IoT applications were SWKS would need to supply 10s of billions of parts (instead of 200 million)? Would this be a problem? If this is the case then I’m not sure how buying a company in a completely adjacent market would help.

Perhaps this acquisition is more about SWKS diversifying into a completely different fast growing business. Is it opportunistic or is it diworsification? Then there’s the $75M in annual synergies. Companies often justify acquisitions, in part, because of synergies. Whether such cost savings will actually be realized is another matter. We will see. Still not sure that I think of the acquisition…

Chris

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I just finished listening to a replay of the call. Anyone invested in SWKS should listen to it. There are a lot of little details that come out in answers to analyst questions that I think help to pull together a big picture of what’s going on: there are many considerations and many little advantages that SWKS sees beyond the big obvious stuff IMHO.

Hopefully a transcript is made available. I have a tough time taking notes and listening at the same time, so I tend to listen. But here is my impression off the top of my head.

First, it sounds like SWKS has been watching PMC for a long time, but wanted for the timing to be just right in terms of industry opportunity and PMC’s own “painful transition” to be complete. Management is very bullish on PMC’s opportunities going forward from here. They like the culture of the company, they like the talent, they like the highly defensible IP portfolio, low employee turnover, and very high gross margins (which SWKS believes is indicative of PCM’s competitive advantages).

Now, there are two major aspects to this acquisition: first, in the near term, what SWKS can do for PMC. This is mostly a matter of lending it supply chain scale, manufacturing and design expertise, back-office support, and of course customer cross-selling. SWKS management says that they always want an acquired company + SWKS scale to lead to 1 + 1 = 3, and they absolutely see those opportunities with PMC. They especially see it with customers, as they increasingly see large customers demanding a certain scale from their vendors, and SWKS can lend PMC that scale. I think it’s worth noting here that SWKS has an excellent track record of acquisitions.

The second major aspect is what PMC can do for SWKS. This is certainly fuzzier, especially in the near term. There is some overlap between the two companies where shared technology can benefit SWKS, such as in mixed signal processing, optical networking tech, etc. But I think this is more about positioning itself for IoT. SWKS management believes that while IoT is going to explode and be huge, it’s going to be very high mix: there are a lot of little things that really have to come together to provide an enticing solution: great RF, solid power management, flexible software, management of the resulting data, etc. And SWKS sees PMC as a filling a very important gap in their current offerings, both with storage and management, and – maybe even more critically – the software layer (and I’m sure other things that I missed). Management has said this is a very customer-driven acquisition based on the very candid conversations they’re having with customers.

So my take-away is this: SWKS management believes they’re making a shrewd acquisition of a company that, on its own, has tremendous potential and is just about to realize it, and should really prosper with SWKS added scale, expertise, and customer connections, and all the benefits those bring. But PMC is in a market SWKS has been watching for a long time, and it also will bring a lot of optionality to SWKS’ own IoT business and should ultimately lead to more competitive offerings.

A few other housekeeping notes: management plans to pay down the debt very fast, basically eliminating it over 2 years, while maintaining their commitment to the dividend and buyback program. Out of the gate, they’ll have 1.2x leverage and will deleverage quickly.

The projected $75M in synergies are just cost synergies, not revenue synergies, so there’s obviously a lot of additional potential as the businesses integrate.

Again, I recommend listening to the whole call: most of the color comes in answers to the analyst questions (the prepared commentary isn’t too different from what was said in the press release).

How are others looking at this after listening to the call?

Neil
Long SWKS

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David Aldrich the CEO of Skyworks, explained that for a certain level of customer, Skyworks can’t even get in the door without a certain level of size and scale, so this deal helps them enter those markets

Upon further reflection, Aldrich was talking about PMCS’s (not SWKS’s) ability to get in the door with customers.

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One of the news feeds talked about expanding SWKS’s business due to concerns about rising inventory levels. Did I miss something about inventory build up at SWKS? Anything in the call about inventory?

KC

Reference:

"Skyworks said Tuesday it will buy PMC Sierra for $2 billion in cash in a bid to strengthen its position amid concerns about high inventory levels in the semiconductor sector. Skyworks shares fell 5.1% to $77.72 while PMC Sierra soared 33% to $10.25. The acquisition is expected to close in the first half of 2016.

-Sue Chang; 415-439-6400; AskNewswires@dowjones.com "

“In the semiconductor sector” covers a lot of territory. Doesn’t say anything specific about SWKS. Sloppy writing or extending a generality to SWKS or… !@#! Almost 1 a.m. To bed.

KC

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"Skyworks said Tuesday it will buy PMC Sierra for $2 billion in cash in a bid to strengthen its position amid concerns about high inventory levels in the semiconductor sector. Skyworks shares fell 5.1% to $77.72 while PMC Sierra soared 33% to $10.25. The acquisition is expected to close in the first half of 2016.

-Sue Chang; 415-439-6400; AskNewswires@dowjones.com "

SWKS works with customer on products one or more years prior to product introduction. It’s a collaborative effort to make SWKS components that go into OEM products. It would seem to me that with such visibility that SWKS would not have an inventory problem. Also, I would think that it would be the OEM’s job to forecast demand for their products and then place the appropriate order size for components from SWKS. Again, it seems that inventory would not be SWKS’s problem. If demand for the OEM’s product is less than forecast then I would expect reorders for the SWKS components to be affected, but managing the supply chain should be the OEM’s responsibility, and it should be SWKS’s responsibility to meet the OEM’s orders within the timeframe agreed upon.

Chris

Neil, and others,

Thanks for the great summary and thoughts, it has reinforced my convictions that this was not a “horrible” deal worthy of a large price drop. I was able to add to my position at just over $75 and now that it is back to $79, it is probably even “safer” to buy as the public analysis and commentary is all built in and the weak holders have all left.

How are others looking at this after listening to the call?

Hi Neil,
Here’s what I did today. It was an exceptional day. I wanted to buy more SWKS but didn’t have cash so I sold a piece of my BOFI, which was the only one I had which hadn’t sold off in this correction and was making new highs, and was (and still is) one of my biggest, most overweight positions. I sold at $134.30 (up 75 cents from previous close and above the all-time high)

I used seven-eights of the money I raised to buy SWKS at $75.45 (down $6.45, or 7.9% from previous close) and used one-eighth to buy ABMD at $84.50 (down about $7.35, or 8.0% from previous close).

As I write,
SWKS is at $80.40 (up 6.6% from my purchase.
ABMD is at $84.70 (up 0.2% from my purchase
BOFI is at $134.5 (up 0.15% from my sale

Best

Saul

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Saul did you go over your 20% limit to do so? I was contemplating a similar move but I’m already over my self-imposed 10% limit (mine is lower) so did not.

ps- good for you, nicely done.

How were you able to listen to he replay? I cannot access it. The phone replay is not available until 9 pm. I tried investor relations and all I get is music…

Long Skws and not convinced this is smart,
Flygal

Saul did you go over your 20% limit to do so?

Didn’t go over the limit because it was so far down when I bought.

By the way, I only sold 5% of my BOFI position and kept 95%. This wasn’t a total rearrangement of my portfolio. I just couldn’t resist the bargain prices.
Saul

How were you able to listen to he replay?

Hi Flygal, here is the link:

http://investors.skyworksinc.com/eventdetail.cfm?EventID=165…

Then click “Listen to webcast”

Neil

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Thanks Neil, but I am still getting music, nice acoustic guitar…

This article covers some interesting angles that haven’t yet been discussed including:

  • the earnings raise that accompanied the takeover which some were unimpressed with (possibly the reason for the initial drop)
  • analyst reaction to the rationale of the deal and consequential recommendations
  • assessment of some competitors including Avago

One point not really covered in the discussion so far I the backstory of ongoing semiconductor consolidation. If Semis are going to keep on consolidating it makes sense for SWKS to get in and grab the most complimentary and attractive targets that will build out its scale in order to keep it ahead in a much more consolidated landscape. I think the end market diversification this deal generates is a positive.

http://blogs.barrons.com/techtraderdaily/2015/10/06/pmc-soar…

Ant

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I found it both ironic and amusing that I spent about three hours last night deliberating whether to invest in SWKS or AVGO (I kid you not). I felt that decent entry points might come to hand. When I woke to find that SWKS was acquiring PMCS, I discarded my notions.

I agree with GauchoChris that the central question is: “Is it opportunistic or is it deworsification?”

As always, analysts were quick to jump to conclusions. It’s all been “first-order thinking” so far. A whole lotta questions beg for answers before an investor can conclude this marriage will prove fruitful. But, as usual, Wall-Streeters love mergers and acquisitions. M&A constitutes a significant source of revenues for Wall Street. It takes a contrarian to question any deal. Also, as usual, there’s the standard CEO script announcing the deal will be accretive, lucrative even as a result of (usually) undefined synergies resulting in a whole greater than the sum of the parts. We’ve all heard this spiel many times over.

How 'bout we dip a toe into “second-order thinking” and consider the merits of PMCS as an acquisition? I’m familiar with the company. I held it in my portfolio during the heady days of the fiber network build-out in the dotcom era. It was quite the high flyer then. Just glance at this chart of the company’s history:

http://finance.yahoo.com/echarts?s=PMCS+Interactive#symbol=P…

Oh, yeah, it was quite the high flier back in the day. I sold it in 2000 and never looked back, because the astute observer will note that company shares have pretty much flat-lined for over a decade. PMCS hasn’t accomplished much of anything noteworthy for a long, long time. I had no interest in purchasing shares at $7, and have absolutely NO interest at buying shares at $10.

PMCS does not impress. It suffered a couple of truly dismal years recently and seems to be turning around a bit. Even so, the financial metrics are not inspiring:

http://finance.yahoo.com/q/ks?s=PMCS+Key+Statistics

Operating Margin=4.35%; Profit Margin=.73%; Return on Assets=1.8%; Return on Equity=.67%; Negative YOY revenue growth; Debt to Equity=6.54. Color me unimpressed.

I’m not sure what SWKS hopes to accomplish. It appears the company will be nursing the sick rather than joining forces with a powerhouse. I’ll sit this one out.

Meanwhile, I’ll keep adding to my Micron position. I’ve been building a position since August.

May we all live long and prosper!

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Thanks Neil, but I am still getting music

I just tried it, and it’s working for me. Maybe they had a glitch earlier?

Neil

This board is great. Look at the immediate analysis from Neil, others chiming in, and putnid’s bear comments on PMCS. It is really quite amazing. Try to find another place that gives you this level of critique this quickly. I dare you.

Honestly, after hearing about the acquisition, thoughts began swirling. I don’t have independent analysis to offer to the group, but wanted to say how amazed I am at the level of quality and timely input.

Putnid - People have wondered about the history of PCMS and you’ve given a good accounting. Thanks for having the knowledge and gumption to show others.

So to those more knowledgeable than me, what do you have to say in response to Putnid’s arguments? PCMS appears to be rather stagnant. What are we missing?

I believe we trust management. They have been forward looking and conservative in their growth estimates. What does management see that we don’t?

Thanks,
A.J.

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