MACOM Technology Solutions Holdings (MTSI) - Get MACOM Technology Solutions Holdings, Inc. Report early on Monday said it had agreed to purchase fellow semiconductor provider Applied Micro Circuits (AMCC) for $770 million.
The cash-and-stock transaction values the Santa Clara, Calif., target at about $8.36 per share, representing a 15.4% premium to its closing price on Friday. MACOM said it expects the deal to close in the first quarter of 2017.
Through the deal MACOM will pay $3.25 per share in cash plus 0.1089 MACOM shares per share of the target. AppliedMicro had $82 million in cash and short-term investments as of Sept. 30, meaning the deal has a $688 million value net of the cash.
The deal likely will "expand and accelerate" MACOM's "breakout growth" in cloud services, enterprise networking and data centers, President and CEO John Croteau said in a Monday conference call. A 100G PAM4 single-wavelength Ethernet solution using an AppliedMicro chip recently has been recognized as the "industry standard" for enterprise and data center connectivity, Croteau added in Monday's statement.
"If you look at the aspects of how this [deal] is complementary, it's both product as well as market," the CEO noted on the call. "It immediately establishes an incumbent position for the companies ... supplying strategic components to both enterprise network customers like [Cisco Systems (CSCO) - Get Cisco Systems, Inc. Report and Arista Networks (ANET) - Get Arista Networks, Inc. Report ], as well as all the major cloud service providers."
MACOM estimated the deal would be immediately accretive to its non-GAAP revenue growth, earnings per share and operating margin.
As part of the acquisition, MACOM said it will divest AppliedMicro's Compute business within the first 100 days after the deal closes. The Compute unit deploys hard architecture into core processors of data centers, Croteau said on the call.
AppliedMicro has been exploring strategic options for the business over the past several months, and there is strategic interest among several potential buyers and investors.
MACOM CFO Robert McMullan said during the conference call that it's too early to estimate the valuation of the computing business, but the unit is contributing 1% of revenue while comprising 51% of AppliedMicro's operating expenses.
"So you can see here, this investment-mode business is consuming much of the profitability," Croteau said. "It's not a bad thing; like I said, it's very well positioned. ... It just doesn't fit MACOM's needs on the short term and even in the long term as this business succeeds."
AppliedMicro's legacy processing unit also may be divested as part of the deal and has already attracted several "very interested buyers," Croteau said. The business, which produces computer processors, contributed 27% of the company's revenue.
AppliedMicro's core connectivity business produces 72% of the company's revenue and 49% of operating expenses.
AppliedMicro had $165 million in revenue over the past 12 months, and MACOM said the companies' combined trailing 12-month revenue is $709 million, or $644 million excluding the Compute operations. The acquirer also said it would benefit from more than $600 million in net operating loss carryforwards.
Speculation of a possible deal started to develop in 2015 when AppliedMicro brought on longtime shareholder Christopher Zepf, founder of hedge fund Kingdom Ridge Capital LLC, to its board. Kingdom Ridge is one of AppliedMicro's largest shareholders, with a 9.4% stake as of May 31, Securities and Exchange Commission filings show.
Analysts told TheStreet's sister publication The Deal in 2015 that AppliedMicro could be a takeover target of chipmaker Qualcomm (QCOM) - Get QUALCOMM Incorporated Report or Marvell Technology Group (MRVL) - Get Marvell Technology Group Ltd. Report .
The chipmaker market has been buzzing with a number of deals of late.
Broadcom (AVGO) - Get Broadcom Inc. Report in November moved to scoop upBrocade Communications Systems (BRCD) for $5.9 billion. The same week Inphi (IPHI) - Get Inphi Corporation Reportsaid it would pay $275 million for ClariPhy Communications, a producer of high-speed systems on a chip used for data and telecom networking, and Lattice Semiconductor (LSCC) - Get Lattice Semiconductor Corporation Reportagreed to be acquired by Canyon Bridge Capital Partners for about $1.3 billion including debt.
In addition, Qualcomm in late October agreed to acquireNXP Semiconductors (NXPI) - Get NXP Semiconductors NV Report in late in a blockbuster deal worth $47 billion and Intel (INTC) - Get Intel Corporation (INTC) Report in December bought Altera for $16.7 billion.
Macom shares were down 6.3% before the opening bell Monday to $44.01. AppliedMicro shares were up 11.7% to $8.10.