Philips Electronics NV caught the industry off guard last week, making a surprising bid to acquire VLSI Technology Inc. for $776.9 million in cash.
VLSI, a maker of ASICs primarily for the communications market, would be key to Philips' strategy of strengthening its muscle in Silicon Valley and accelerate its system-on-a-chip efforts.
"They complement each other quite well," said Scott McGregor, senior vice president and general manager for emerging businesses at Philips Semiconductors, based in Sunnyvale, Calif. "VLSI has a basic set of ASIC technologies, and a number of technologies in the areas of baseband, RF communications, and networking, and those fit very well with Philips."
VLSI executives were hit with the news on late Thursday in a letter from Philips president and chief executive Cor Boonstra to VLSI CEO Alfred J. Stein. Boonstra asked Stein to take the proposal to VLSI's board of directors and respond by March 3.
"With respect to Philips, they are a very strong, big, powerful company. They've done very well in semiconductors, particularly in this past year. When we get any kind of an offer, our reaction is that we'll take that offer to the board, and evaluate it and respond appropriately," Stein said in an interview. The proposal will be evaluated at VLSI's regularly-scheduled board meeting Wednesday.
Philips offered to pay $17 per share for 45.7 million of VLSI's outstanding shares, a premium of nearly 60% to VLSI's closing price of $10.75 last Thursday.
VLSI has three options, said Michael Geran, an analyst at the Pershing/Division of Donaldson, Lufkin & Jenrette Securities, Jersey City, N.J. The company can negotiate a higher price, have its investment banker, find a "white knight" that it deems a better strategic partner, or launch a major buyback, which is the least probable scenario, Geran said.
"There are some other people in Silicon Valley that might be interested, particularly now that these guys are in play," he said.
VLSI's Stein declined to comment on industry speculation.
Last year, scuttlebutt surrounding a merger between LSI Logic Inc. and VLSI Technology had been circulating; analysts said that LSI's bid was higher than Philips'.
Although VLSI emerged out of red ink in 1997 after posting losses in 1996, the company's revenue and net-income growth tumbled again in 1998. Revenue fell 23.1%, to $547.8 million, while net income was down 70.9%, to $20.9 million.
Whatever the outcome, VLSI will continue to pursue its three-pronged strategy of providing leadership technology, the capability to produce large, complex chips quickly, and CDMA, TDMA, and GSM chipsets for the wireless market, Stein said.
In January, VLSI began coverting its San Antonio fab to 8-in. capability. The chip maker also is working on 0.15-micron process technology.
Philips believes that VLSI would boost its presence in North America, which accounted for 20% of its chip revenue in 1997, according to a Philips spokesman in Eindhoven. Philips generated $4.45 billion in semiconductor revenue last year, essentially unchanged from 1997 figures, according to Semico Research Corp.
Some analysts suggested that an acquisition could position Philips to spin off its chip company, a process that its European counterpart, Siemens Ltd., began last November.
"Philips should divest its semiconductor business," said Nils Meyles, an analyst with Bank Banger-Pontier, Amsterdam. "This acquisition could enhance this process."
Other market watchers believe the acquisition may not fit with Boonstra's intention to invest the company's cash wisely. What Philips really needs in order to move its system-on-a-chip strategy forward is a company with strong intellectual property, not ASIC expertise, they say.
"I'm not sure what they are getting by buying an ASIC company," said Nimal Valliupuram, an analyst with Everen Securities Inc., Chicago. "Philips should be looking for companies in analog and DSP. From VLSI's point of view, it sounds like a good deal, but not for Philips."