NEW YORK – Microchip Technology has announced its signing of a definitive agreement to acquire Standard Microsystems Corporation (SMSC), a company focused on mixed-signal connectivity solutions, for $37.00 per share in cash, which represents a total equity value of about $939 million. SMSC’s balance sheet consists of cash and investments worth about $173 million, making a total enterprise value of some $766 million, according to Microchip.
The deal puts Microchip – long known as a “long-tail” company with 70,000 customers – on a new trajectory.
With the SMSC acquisition, Microchip will likely be more exposed to the fast-changing, low-margin consumer market it has long avoided. (SMSC has a sizable business in input/output connectivity technologies in computing and consumer products.)
On the other hand, the acquisition will surely help Microchip expand into the automotive “infotainment” market -- a key to the company’s growth strategy. Microchip will ride on coattails of MOST (Media Oriented Systems Transport) bus, a high-speed multimedia network technology designed for the automotive industry, of which SMSC is a founding member and market leader, with close connections with automotive OEMs.
In a conference call Wednesday, Steve Sanghi, Microchip’s President and CEO, said of the acquisition, “We have very little product overlap, while we share many common customers.” That gives both companies “cross-selling” opportunities, he said.
Microchip is also attracted to SMSC’s rich IP portfolio and building blocks. Sanghi said that SMSC adds a strong patent portfolio to Microchip’s. Microchip takes over some 300 SMSC patents, in addition to 100 patents pending.
Among various SMSC product lines, Microchip identified two – automotive and wireless audio – as fast-growing segments.
In automotive alone, SMSC has leading positions in four key technologies: MOST bus for high-bandwidth infortainment backbone; Ethernet for diagnostic and software download; USB as consumer port (for mobile device connection); and Kleer, a proprietary standard, that provides low power, uncompressed, high-quality wireless audio and control.
Speaking of MOST, in which SMSC has strong working relationship with leading automotive OEMs, and has supplied USB, Ethernet and other wireless technologies, Sanghi said, “MOST is a dominant standard and I know SMSC has a leading position. We also know that the company has a number of design-wins in the pipeline.”
Sanghi expressed his hope that the deal will open doors for Microchip, allowing it to pitch its own microcontrollers and analog components for next-generation automotive infotainment systems. “Automotive OEMs are making architectural choices right now,” said Sanghi.
Asked by financial analysts what divisions or product lines of SMSC Microchip might think about pruning, Sanghi declined to comment. Noting SMSC’s annual sales of $412 million (in the fiscal year ending Feb., 29, 2012) and its 54.4 percent non-GAAP gross margin, Sanghi said, “Not a tremendous number of surgeries are needed here.”
In merging the two companies, Sanghi said, the first step is to take SMSC to a horizontal market loaded with 70,000 customers – a strategy familiar to Microchip . Looking back on the time Microchip got into the touch controller business, Sanghi remembered skeptics who said the technology was exclusive to the cell phone market. “But we found a plenty of design wins in industrial and automotive markets for touch.” Sanghi is convinced that Microchip can perform similar magic on some of SMSC’s technologies.
Asked if Microchip might plan to drive its embedded memory into SMSC's chips used in computers, Sanghi made it clear, “We have no intention to grow our memory business at the expense of margin disciplines.” He added that the company’s mindset for memory strategy is in going for profitability, not for market share.”
All of which comes down to the old refrain: How these two strangers are going to get along together is still, mostly, mystery.
How will they get along? They both were Long Island companies a few decades ago -- there was for a while a mixture of sales and marketing types. And the current Engineering head is ex-Microchip (when it was called General Instrument Semiconductor.)
And, if course, because it is Long Island it is technically the best.
Working for a media company whose office is located in Long Island, I do have to agree with you, Tom. Ha, ha.
But seriously, this is a BIG acquisition for Microchip; and a big change for SMSC. A lot of people's lives will change.
I wouldn't necessarily call SMSC's business blanketly "low-margin" business, though. SMSC has a collection of unique, proprietary technologies -- incluidng Kleer and MOST. SMSC's business always fascinated me.
Hi, yalanad. It's true that the computer and consumer business these days is often regarded as "low-margin," and those in the financial community (and obviously our readers too)are averse to that.
But look. SMSC’s annual sales is $412 million and it's got 54.4 percent non-GAAP gross margin. My friend, that is NOT bad.
However, you do ask a good question. Why did SMSC start looking to be sold?
A little over a year ago, SMSC was on its own expansion plan, and it was going to buy Conexant.
But the deal fell through, as Conexant went to Gold Holdings, Inc., an affiliate of San Francisco-based private equity firm Golden Gate Capital.
I would love to get a chance to sit down with Christine King, SMSC CEO, and ask her what prompted this sale.
SMSC is in a quiet period and nobody at SMSC is talking at this point.
Microchip CEO refrained from commenting any questions regarding to SMSC's motivation, or whether there was anyone else was courting SMSC.
Microchip must really like the 8051 - they have bought another 8051 company !
That aside, SMSC has a _very_ different customer profile to Microchip, which is sure to cause significant mindset and culture issues.
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