Cypress Doubles Down, Continues Bidding War for Integrated Silicon

NEW YORK (The Deal) -- Cypress Semiconductor  (CY) shows no sign of bowing out from a seven week-long bidding war for Integrated Silicon Solution (ISSI). The semiconductor company is confidently pursuing its smaller peer against China's Uphill Investment for the last piece of the puzzle it needs in the automotive chip market. 

San Jose, Calif.-based Cypress said Monday that it is increasing its offer to acquire ISSI to $22.25 per share, or about $706.7 million, beating out Uphill's latest bid of $22 per share. In a letter Monday to ISSI Chairman Jimmy Lee, Cypress President and CEO T.J. Rodgers highlighted the strategic value of a tie-up between Cypress and ISSI.

"This Cypress proposal is clearly superior to an Uphill proposal at the same price per share, given our inclusion of a ticking fee and our mitigation of regulatory risk," Rodgers wrote, explaining that Cypress has gone to great lengths to address ISSI's concerns.

In March ISSI agreed to be acquired for $19.25 per share by the Chinese investors at the same time as it was in the middle of an activist campaign from Starboard Value. Cypress launched a spoiler bid of $19.75 in May and started a heated bidding war for ISSI, which is based in Milpitas, Calif.

"Cypress has been on the road, talking to their investors. They're telling them, we own this thing," said a source close to the matter who asked for anonymity. "Both of these buyers have a very strong strategic desire to win the business."

Sources had previously told The Deal Cypress has long been eyeing ISSI. While ISSI had declined to engage in talks about a potential transaction, Cypress CEO Rodgers is known for his determination, sources said. The source said Monday that Cypress currently provides three types of memory chips for an automotive system and ISSI has the last piece of the puzzle the chip giant needs to become a leader: DRAM memory chips.

"There's no better company better suited to supply DRAM in the automotive market than ISSI," this source said, while adding that Uphill is part of China's aggressive push to expand its domestic chip market.

Based on industry multiples, the initial $19.25 per share offer from Uphill was underpriced, this person said, adding that the bids are now starting to enter a more reasonable takeover price range. One source close to the situation had previously said $25 per share, or about $794 million, could be the maximum price tag for ISSI.

Meanwhile, B. Riley analyst Craig Ellis wrote in a note Monday that offers from Chinese entities for U.S.-listed companies had a premium ranging from 5% to 20%, which would suggest $23.10 per share price tag for ISSI.

The bidding war for ISSI is a continuation of M&A among chipmakers, said Stephens analyst Harsh Kumar, adding the semiconductor market simply has too many mid-sized players. For instance, Intel (INTC) snatched up Altera  (ALTR) for $16.7 billion while Avago Technologies  (AVGO) is shelling out $37 billion for Broadcom  (BRCM).

"When you compare a traditional industry that's already consolidated, you have four or five super-large companies, seven or eight decent size companies and maybe 20 small companies," he said, adding that there are about 100 small companies in the semiconductor space and consolidation will continue.

ISSI is scheduled to hold a special meeting to vote on the Uphill deal on June 25.

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

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