NEW YORK (The Deal) -- Vitesse Semiconductor's (VTSS) agreed sale to Microsemi (MSCC), which was announced on Wednesday, has occurred early in the consolidation of chip makers and will only widen the spotlight on Atmel (ATML) and Silicon Laboratories (SLAB - Get Report) as potential merger-and-acquisition targets, according to industry analysts.
Aliso Viejo, Calif.-based chip maker Microsemi said on Wednesday that it has agreed to purchase Camarillo, Calif.-based Vitesse for about $389 million, or $5.28 per share, in cash. The price represents a 32% premium to the average closing price of Vitesse's shares during a 30-day trading period ended on Tuesday.
"It's a nice tuck-in for Microsemi," said Betsy Van Hees, an analyst at Wedbush Securities. "As for Vitesse, it's great for the shareholders."
That Microsemi made the move hardly surprised Van Hees, who said dealmaking is part of the company's "core DNA" and the reason for its growth.
"Microsemi is quite the acquirer," she said. "This isn't anything new for them."
The technology company acquired Santa Rosa, Calif.-based Centellax and bought Cork, Ireland-based Mingoa in 2014, and it purchased Symmetricom in 2013. Microsemi, which has a market capitalization of about $3.25 billion, is likely to pursue more acquisitions, Van Hees noted.
"Ten years ago, everyone wanted to be on their own. Five years ago, everyone wanted to be their own," she said, adding that it wasn't as difficult for small companies to organically grow revenue and find scale in the past.
But the semiconductor industry has seen a "significant shift" over the last couple of years, Van Hees said, explaining that pursuing acquisitions is the easiest way for companies to grow in a capital-intensive market. Generally, there are also plenty of opportunities for synergies for combined semiconductor companies, she added.
Van Hees explained that in a market that is still "in the early innings of consolidation," more M&A will take place, and that Atmel is among chip makers that could emerge as an acquisition target.
"The company is doing a good job positioning itself," she said of Atmel. "They're exiting businesses that they've had challenges with."
San Jose, Calif.-based Atmel has viable intellectual property and an attractive authentication chip business.
"If you look at the management team, it's not an entrenched management team," Van Hees asserted. "They don't have anything like a poison pill."
Microchip Technology, which offered to buy Atmel in 2008 with On Semiconductor, could decide to pursue the chip maker again, Van Hees explained. Atmel has a market capitalization of about $3.5 billion, and shares are up about 1.8% year-to-date.
Austin, Texas-based Silicon Laboratories is yet another chip maker that could make for an interesting acquisition target, said an industry source who asked for anonymity.
"They're big, but not quite big enough," this person said. "If they were to get merged or get bought, they would extract a lot of cost savings and create a lot of value."
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Silicon Labs has a market cap of about $2.2 billion, and its shares are up about 7.3% year-to-date.
Jim McGregor, founder and principal analyst at Tirias Research, wrote in an email that both Atmel and Silicon Laboratories have microcontrollers, wireless-interconnect technology and sensors. The three, he noted, are "critical product areas for connected solutions."
"Each company has specific markets (or) applications where they are very competitive," McGregor explained, adding that Intel (INTC - Get Report), Qualcomm (QCOM - Get Report) and Taiwan Stock Exchange-listed MediaTek may express interest in Atmel and Silicon Labs.
Still, Silicon Labs has been more of an acquirer, according to Stifel Nicolaus analyst, Tore Svanberg. So far this year, the chip maker has bought Energy Micro and Bluegiga Technologies.
"They've been in the process of acquiring companies and investing in the future," Svanberg said of Silicon Labs.
While he declined to comment on Silicon Labs as a potential target, Svanberg did note that from an acquirer's perspective, it could be a good time to buy the chip maker given that the buyer would be able to "harvest those returns."
Svanberg added that as the semiconductor industry matures, growth is slowing down and scale is becoming more important than scope. Also, many founders and executives of semiconductor companies tend to be older in age and may be more interested in selling their businesses, he added.
"There was already a high demand for consolidation four, five years ago," Svanberg said.
But the timing was not ripe for selling, as multiples and valuations simply weren't there. In comparison, interest levels and the cost of debt are low today, he added.
The deal flow within the semiconductor market has certainly been fluid on all levels.
Earlier this month, NXP Semiconductors (NXPI - Get Report) agreed to purchase Freescale Semiconductor (FSL) for $16.7 billion, while Cypress Semiconductor (CY - Get Report) and Spansion completed a merger valued at $5 billion.
Meanwhile, Integrated Silicon Solution (ISSI) agreed last week to be taken private by a Chinese consortium of investors led by Summitview Capital for about $640 million following Starboard Value LP's activist campaign late last year.
Silicon Labs officials declined to comment, while those with Atmel could not be reached Wednesday.
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