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.
Ethernet may be larger in terms of devices shipped, but it's not the only network architecture.
If I'm a chip maker, I'm concerned with volumes. If I make a chip supporting a certain kind of network, is there a big enough market for it? How many units can I sell? How much must my price be at that volume to make money? Can I get that proce?
Every car is now a smartcar, with it's own local area network (likely based on CAN, first developed at Bosch) and chips passing messages back and forth across that network. Devices that interact with the driver and passengers are joining the mix, and MOST appears to be an attempt to aid that integration.
In terms of Microchip and SMSC, the automotive market is a very large one, and design wins there will be attractive targets. Since the cost of chips aimed at that market will be a far tinier percentage of the total cost of building a vehicle than the corresponding cost of, say, a chip in a smartphone, I would expect to be able to charge more per chip. It may not be a low margin commodity business.
Well argued points @DMcCunney...if I am a chip maker I would gladly support a new communication protocol like MOST as it is a new market for me, and yes it is a big market...but if I am a car maker I would want to have the cheapest, proven technology so I should vote for Ethernet not MOST...but perhaps Ethernet doesn't cut it technically, maybe there is a media aspect of this communication car technology that is served much better by MOST...Kris
MOST seems to be a de facto standard for what it is trying to do. It wouldn't have gotten there if car manufacturers weren't on board. If I'm a car manufacturer, I want the cheapest solution that *works* for the problem I want to solve.
Ethernet is proven, low-cost, and well understood, but it won't work for *every* networking application, and this seems to be an area where ethernet won't do. If it did, why isn't the auto industry using it?
For Microchip, the issue is the same as it is for any company venturing into a new area. How good is the opportunity? Do they *understand* the market? Do they recognize how the business and sales cycles differ from the ones they are accustomed to dealing with, and what changes they will have to make in how they do things to be able to address that market?
One of the original questions raised was the difference in business models of Microchip and SMSC, and how compatible they were. A company turning out scads of low cost chips for a big market and relying on volume is a different animal from a company making a lower volume of higher priced chips for more specialized markets. They fact that they are different underlies some of the questions regarding the merger. How well does Microchip understand the markets SMSC addresses? How well does it understand the differences between its business model and SMSCs? How well will it do at blending them, and executing equally well in those different markets?
Some classic failures have come about as a result of acquisitions where the acquirer *didn't* understand the differences, tried to manage the acquisition the same way it managed itself, and went belly up in consequence.
We'll see. I see opportunities in the auto market for Microchip if they have that understanding, and can use SMSC's established presence to address those opportunities.
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