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