Call it Greg and Rich's excellent adventure. The pair of seasoned semiconductor executives -- Greg Williams and Richard Beyer -- came together last week to announce the $1.24 billion acquisition of Elantec Semiconductor Inc. by Intersil Corp. To hear them tell it, the prospects for the new, larger company are bright regardless of the premium paid for the acquisition.
The reason for their optimism? The companies' products and technology are complementary.
Elantec, Milpitas, Calif., brings to the table experience in flat-panel-display devices and optical-storage ICs. Irvine, Calif.-based Intersil's strengths are in WLAN chipsets and power management devices. According to Williams and Beyer, the new company is positioned to capitalize on skyrocketing demand in four hot markets: recordable DVD , 802.11 WLAN, Pentium 4 power management, and flat-panel displays.
The post-merger Intersil expects to find opportunities in emerging product segments such as handheld computers and cell phones, said Williams, Intersil president and chief executive, who will become executive chairman of the new company.
"The whole issue of portability will drive a lot of our company's sales as it increases personal freedom to do things away from the desk," he said. "Portability is the essence of these applications and is a common theme of Intersil and Elantec."
Next-generation handheld devices will account for significant growth during the next two to three years, according to Beyer, Elantec's president and chief executive, who will take the same title at Intersil. "Next-generation PDAs will have color and video LCDs, which will stimulate our buffers and drivers. These markets will also drive our power management devices," Beyer said.
In optical storage, Intersil will move from red laser to blue laser drivers, which will offer recordable media seven times denser than DVDs and more than five times that of CDs, Beyer said. "These areas will be driven by handhelds as well."
Beyer and Williams declined to inform EBN during an interview last week what new markets the company plans to enter, or disclose new technologies under development. However, referring to the crucial role analog plays in fiber optic communications, Beyer noted the latent opportunities offered by long-haul telecom networks, despite the current downturn. "As down as everyone is on telecommunications at the moment, the wired telecom world will inevitably bounce back, and we plan to benefit from it," Beyer said.
The bigger the better
Historically, mergers of analog IC suppliers have served as an effective means to grow in the analog business, according to Drew Peck, an analyst at SG Cowen Securities Inc. in San Francisco. "Compared to logic and memory suppliers, bigger has been better for analog suppliers because customers prefer single, one-stop suppliers," he said.
Indeed, increasing the critical mass of its analog product offerings was becoming all-important for Intersil, said Ambrish Srivastava, an analyst at ABN AMRO Inc. in San Francisco. "This was a reasonable acquisition because they needed to increase their analog product base in order to compete with the big boys such as Analog Devices," he said. "Growing their analog portfolio this way is a natural course of their evolution."
The new Intersil faces tough challenges in all its markets, Beyer said. In power management, there is Maxim and Linear Technology. In flat-panel drivers, there's Analog Devices and National Semiconductor. In optical storage, Intersil competes against Sony's internal development. And in WLAN, there's Agere.
Still, the hefty acquisition price tag has come under scrutiny by analysts. "Paying 11 times sales is historically a lot, given that the average buying price over the past decade has been about three times sales," Peck said. "But given the current context since 2000, companies have continued to pay an average of nine to 10 times sales, so in that sense the [entire semiconductor acquisition market] is inflated."
The companies' relatively strong financial performance through the downturn further supports the value of the deal. In 2001, both were profitable, had positive cash flow, and had gross margins over 50% in a market that was down 32%, Williams said.
"Analog companies typically have higher valuations than other chip companies, and in this case Elantec and Intersil are two strong players," he said.
The markets the company is focusing on are the fastest growing in the industry, according to Beyer. For WLAN in particular, which will account for more than 25% of the new company's sales after the completion of the acquisition, Intersil continues to capitalize on its incumbent position, in spite of increased competition by a spate of new players and standards.
"The future looks good for Intersil in WLANs, although they haven't generated that much excitement of late because of the hype generated by WLAN competitors," Srivastava said. "However, the up-and-coming guys don't have customers yet and both Intersil and Agere are a year and a half ahead of competitors with their 802.11b WLAN products. When the competing WLAN standard 802.11a takes off in a couple of years, Intersil will also already have WLAN channels."