These Companies May Be the Next Big Semiconductor Merger Targets

Blockbuster acquisitions by Qualcomm  (QCOM) , Broadcom  (AVGO) , SoftBank (SFTBF) and Analog Devices (ADI) reshaped the semiconductor industry in 2016 and sure, acquirers will have plenty to digest in 2017.

But despite a narrowing field of chip companies and higher interest rates likely to limit the number of potential deals, there are still a number of targets.

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Maxim Integrated Products  (MXIM) , Semtech (SMTC) , Power Integrations (POWI) , Cypress Semiconductor (CY) , Silicon Laboratories (SLAB) and Cavium (CAVM) fit a financial profile that could make them attractive takeout candidates, RBC analyst Amit Daryanani wrote in a Thursday report.

The companies have roughly 60% in gross margins and operating expenses that account for 30% of sales, which Daryani suggested is an appealing combination. The businesses are profitable enough that a large buyer would not have to worry about diluting its margins. Plus, operating costs are high enough that an acquirer could cut them and make the margins even better.

Maxim, which develops circuits for cars, industrial uses, health care, mobile devices and other applications, has projected 2016 gross margins of 63.4%, according to RBC. SemTech, which develops semiconductor products that wind up in smart phones, medical devices, data centers and other applications, has 60.3% gross margins. Both are in line with Texas Instruments' (TXN) 61.4% gross margins.

For both Maxim and SemTech, operating expenditure accounts for more than 30% of revenue, RBC reports, while Texas Instruments is solidly under 30%.

"With this framework we see that Maxim, SemTech, Power Integrations and Cypress fit nicely," Daryani wrote. "While Silicon Labs and Cavium also fit well, we think both companies would require materially higher multiples due to current revenue growth rates."

Jim Cramer, founder of The Deal's parent TheStreet (TST) , named Cypress one of his top 10 takeover candidates at The Deal Economy conference in December.

One possible holdup is that some of the potential buyers have spent heavily in the last year or two.

Avago Technologies and Broadcom completed their $37 billion merger, which was announced last year, in February. In July, SoftBank said it would pay $32.4 billion (£24.3 billion) for ARM Holdings and Analog Devices agreed to buy Linear Technology for $14.36 billion in July. Qualcomm announced the $47 billion acquisition of NXP Semiconductors (NXPI) in late October.

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Daryani suggested Microchip Technology (MCHP) , Texas Instruments, Analog Devices and Microsemi (MSCC) could be acquirers.

Acquirers with market caps above $20 billion, which includes Texas Instruments ($75 billion) and Microsemi $22.6 billion), Daryanani wrote, would go for targets in the $10 billion valuation range. Among the target list, that would include Maxim ($11 billion).

Buyers with market capitalizations of around $10 billion, which could include Microchip ($14 billion) and perhaps Microsemi ($6.4 billion) in a stretch, would target the $4 billion and below crowd. Among RBC's targets, the lower-valued group includes Semtech ($2 billion), Power Integrations ($2 billion), Cypress ($3.7 billion), Silicon Laboratories ($2.7 billion) and Cavium ($4.2 billion.)

Among the potential targets, Power Integrations declined to comment and representatives of the other possible targets did not immediately respond to queries. The potential buyers did not immediately respond.

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