In a DailyFinance piece last week, I wrote that the semiconductor industry is poised for a nice pick-up in M&A. The major operators have lots of cash and need growth. At the same time, there are many small and midsize companies that are selling at attractive valuations.
This week we got another big deal in the space: Micron Technology (MU), which is the largest US memory developer, agreed to pay $1.27 billion for Numonyx Holdings BV. It's an all-stock deal involving 140 million shares. Depending on the moves in the stock price, Micron may pay up to 10 million more shares.This dilution explains part of the fall in Micron's shares, which are down by 8%. Yet, the deal will be a good boost for the company -- building a stronger footprint in the mobile market.
Back in 2003, STMicroelectronics (STM) and Intel (INTC) formed a joint venture for memory chips. The new entity eventually became known as Numonyx. The company develops a set of advanced chips, with names like NOR, NAND and MCP RAM. It's complicated stuff but critical for modern consumer devices, especially those that have mobile capabilities.
Numonyx has certainly benefited from its major backers and has created a portfolio of 2,750 patents. The company also has a network of facilities across the world, in Israel, China, Singapore, the Philippines and Malaysia.
In the latest quarter, Numonyx generated sales of $547 million and had roughly 5% of the global market. Combined with Micron, the market share will be roughly 19%. The deal will also be accretive to cash flow and non-GAAP earnings by fiscal year 2011.
Taking a Shot at the Competition
To remain competitive, semiconductor companies realize they need to offer packages of technologies. This helps to improve integration and lower costs. Of course, it's expensive and time-consuming to develop new technologies, which are getting more sophisticated. So a smart alternative is to acquire companies.
Micron's deal for Numonyx certainly fits within this strategy. So long as the deal closes -- which it should within the next three to six months -- Micron will become a major player in the mobile market, which is growing quickly because of emerging markets and the popularity of smartphones.
The deal will also put pressure on competitors like Samsung, Toshiba and Hynix Semiconductor, who will see their market shares threatened. Interestingly enough, Hynix has a major partnership with Numonyx, which may now be in jeopardy.
The disruption may result in even more dealmaking to come.
Tom Taulli advises on business tax preparation and resolving tax problems. He is also the author of a variety of books, including the including The Complete M&A Handbook. His website is at Taulli.com.
Introduction to Value Investing
Are you the next Warren Buffett?View Course »