With Cerberus now engaged in the bidding war for SST, Microchip will have to dig deeper into its pocket to close the deal. The current $3.00 per share offer will not satisfy current SST shareholders who have already pushed the stock price well above the bid price.
As of midday on Wednesday (Feb. 24), for instance, SST shares were trading at $3.19 and had during the day even matched the 52-week high of $3.22. The higher trading price indicates stockholders believe Microchip would either raise its bid or other contenders, including Cerberus, would dive in, sparking a bidding war.
Cerberus already has a major leg up on Microchip. In regulatory filings earlier this week, the equity firm confirmed it struck an agreement Dec. 28 with SST chairman and CEO Yeh for his stake in the company. Under the binding agreement, Cerberus secured the rights to vote Yeh's 10.8 million shares in SST.
Additionally, other major SST shareholders who together control 13.7 million shares gave Cerberus the rights to also control their voting stake in the company.
The combined stakes has given Cerberus, or its representative Stephen Feinberg control of about one quarter, or 24.4 million, of SST's outstanding shares.
The group's goal is to enable Cerberus arrange a leverage buyout of the company and recapitalize it by injecting additional funds into the chip supplier.
While Cerberus' involvement in the SST bidding war may appear to complicate the transaction for Microchip, the company could still easily win control of its acquisition target. To do so, EE Times estimates Microchip would have to jack up its offer price to as high as $4 per share.
Although $4 per share for SST may seem high on first consideration, it will enable Microchip get out of what could become a protracted bidding war. Furthermore, the $4 per share offer, or about $383 million, would represent only a 24 percent premium to SST's 52-week high stock price—a level reached in the middle of a global economic downturn.
That would be a reasonable price to pay for a company that comes with $215 million in cash and a substantial revenue stream from the licensing division, a business with no production costs and therefore 100 percent or so in gross profit margin.
Microchip will have to revise its offer since the stock price has broken through its updated $3.00 bid. Any amount that does not immediately put all other bidders out of contention would further suck Microchip into more controversy and its own stock price could take a beating as investors worry about the distraction of its SST transaction, according to Marquis Research's Farooqi.
"The market is saying this deal is worth a lot more and if Microchip wants to get the transaction done it cannot just offer something like $3.50," Farooqi said. "They have to go higher."