Sorry, Cypress -- Chipmaker ISSI Now Favors Uphill's Boosted Buyout Bid

NEW YORK (The Deal) -- Integrated Silicon Solution (ISSI) agreed Thursday to yet another sweetened offer from China's Uphill Investment, leaving observers to wonder whether the bidders are both signaling that they could go even further to acquire the chipmaker in what has already been a heated tug of war.

Integrated Silicon Solution said Thursday morning that it has agreed to be acquired by Uphill Investment for $21 per share, just a day after the Milpitas, Calif.-based semiconductor company announced that it had reached a deal to be bought by its bigger peer, Cypress Semiconductor (CY) , for $20.25 per share.

Based on the 31.76 million outstanding shares of the target, the Chinese consortium's latest offer is valued at about $667 million.

The semiconductor company said its board continues to recommend ISSI's shareholders to vote for the agreement with Uphill. The target added that it will have a special meeting to consider approval of the Uphill acquisition on June 19.

Uphill add fuel to a month-long bidding war with its latest offer, which is $1 per share higher than its previous bid of $20 per share. ISSI initially agreed in March to be acquired for $19.25 per share by a consortium of Chinese investors, now called Uphill Investment, in the midst of an activist campaign from Starboard Value. Cypress launched a spoiler bid in mid-May and has been duking it out with Uphill Investment ever since.

"We've got two macho contenders trying to puff up their chest and get the other one to bow out," said Craig-Hallum Capital Group analyst Richard Shannon on Thursday. He had said in an interview Wednesday that the chances of higher bids coming in were greater than 50%.

In fact, Uphill and Cypress may have taken the bidding war for Integrated Silicon to a whole new level, Shannon said Thursday.

"It's interesting that they raised 75 cents," he said, referring to Uphill's counteroffer for Cypress' bid of $20.25.

So far in the bidding war, the two suitors have been sweetening their offers with slight premiums. Cypress launched its spoiler bid of $19.75 per share on May 13. Uphill responded May 29 by raising its offer to $20 per share, to which Cypress responded later that day by increasing its bid to $20.25 per share.

The higher incremental increase in the price from Uphill may be a signal that the group is willing to go significantly higher to clinch the target, Shannon said, adding that the investors likely have backing from the resources of the Chinese government, and that the leadership at the helm of the world's second-largest economy have declared the semiconductor industry a key area.

Shannon went on to say that at the same time, Cypress's announcement of a plan to divest itself of its TrueTouch mobile touchscreen business shows that it, too, is serious about pursuing ISSI.

San Jose, Calif.-based Cypress, which has a $4.4 billion market capitalization, said Thursday that it had agreed to sell the mobile touchscreen business to Taipei Exchange-listed Parade Technologies for about $100 million. Post-acquisition, Cypress would continue to sell mobile touchscreen products to automotive and home appliance customers.

"It's much more clear from that comment that Cypress is interested in the automotive," Shannon said, adding that the chipmaker can take on more debt with this new equity and its new capital could give Cypress firepower to inject up to an additional $4.50 per share for ISSI.

Sources had previously told The Deal that while there is no clarity around what the back end of the transaction with Uphill Investment entails, it is widely believed that it would allow ISSI chairman and co-founder, Jimmy Lee, to stay involved at ISSI. In fact, the target has repeatedly pointed to potential regulatory risks that the Cypress deal could pose in the U.S. and Germany -- concerns that sources have characterized as a negotiating tactic to persuade shareholders to favor the Uphill deal.

While Cypress was an obvious strategic buyer for ISSI and had long been interested in acquiring the target, ISSI had refused to engage in M&A talks in the past, sources had also said.

Cypress is likely to return to the battle, said a source close to the matter via phone Thursday, adding that the semiconductor giant has enough firepower to continue pursuing its smaller peer.

"The ball is once again back in [Cypress'] court. We also reiterate our belief that the proposed tuck-in acquisition of ISSI will be immediately accretive, but given the back and forth, timing will likely be pushed out and lower our assumptions to $0.10 to $0.20 in 2016 form $0.20 to $0.30," wrote Betsy Van Hees, senior vice president of equity research at Wedbush Securities Inc., in a Thursday note.

Meanwhile, Jeffrey Smith's Starboard Value has been pushing for change at ISSI since November when it launched an activist campaign with hedge fund Oliver Press Partners.

Shares of the target shot up about 4.6% Thursday morning to $21.21 while shares of Cypress slightly went down 0.04% to $13.13.

Officials with Cypress, ISSI and Uphill could not be immediately reached for comment Thursday.

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