Analog chipmaker Semtech (SMTC) is looking more and more appealing as an acquisition target in a rapidly consolidating industry thanks to its strong financial profile. The company could fetch about $2 billion in a sale to a bigger semiconductor maker, according to industry sources.
These people, who asked to remain unnamed, believe M&A will continue to be a key theme for the semiconductor sector in 2016.
Given slowing revenue growth, chipmakers busily turned to acquisitions last year, with multiple mega-billion dollar transactions taking place including NXP Semiconductors' (NXPI) $16.7 billion acquisition of Freescale Semiconductor and Intel's (INTC) $15.7 billion purchase of Altera.
Among the remaining players, Camarillo, Calif.-based Semtech, with a $1.18 billion market capitalization, stands out as an acquisition candidate and could receive a price tag of $2 billion from a bigger rival, said the industry sources.
Some of these sources said Dialog Semiconductor (DLGNF) , in particular, could take a look at Semtech after passing on Atmel (ATML) . Atmel said Jan. 13 a rival offer from Microchip Technology (MCHP) was superior to its initial deal with Dialog Semiconductor, which responded the following day by announcing it wouldn't top Microchip's bid but instead take a breakup fee.
San Jose, Calif.-based Atmel agreed to be acquired by Microchip for $8.15 per share, which consists of $7 per share and the rest in stock. Dialog had offered in September $4.65 in cash and 0.112 Dialog shares for each Atmel share, or $10.42 per share in total, but the British semiconductor company's stock has been plummeting since then.
"Semtech is an interesting company," said one of the industry sources who sought anonymity. "They've done good acquisitions and have a good technology."
In fact, Semtech purchased Gennum for $494 million in 2012, when it also bought Cycelo for $21 million. In 2009, the chipmaker shelled out $180 million for Sierra Monolithics.
"The list of candidates is not going down, and Semtech has built up a nice portfolio," the source explained. "Dialog better move fast."
B. Riley & Co. analyst Craig Ellis said Semtech has very high margins and is a fast-growing business that focuses on the strong end markets of communications and infrastructure. Its financial and growth profile could argue for a multiple of four times to five times sales, he said, adding that, on average, semiconductor companies have garnered about three times sales.
Semtech is currently estimated to generate about $502 million in revenue and $299.3 million in gross profit on 59.6% margins, according to Bloomberg data. A multiple of four times to five times revenue would give the target a potential price tag of $2 billion to $2.5 billion.