Analysis: Cash is 'king' in Microchip, ON Semi bid for Atmel

At the end of the June quarter, Microchip reported it had $1 billion in cash and short-term securities (Sanghi said the company now has about $1.5 billion). Furthermore, Microchip has spent more than $1 billion to repurchase its shares in just the last year, Sanghi noted.

"The current market has challenges," added Donald Colvin, executive vice president, treasurer and CFO at ON Semiconductor. "Both [Microchip and ON] generate a lot of cash, and we should be able to get financing even in the current environment."

Both Microchip and ON Semi need new revenue streams after two years of slumping sales. Revenues for both barely budged in 2007 after healthy growth in the prior year.

At Microchip, for instance, revenue for the fiscal year ended March 31, 2008, was $1.04 billon, largely unchanged from the previous year. Also, ON Semi reported lackluster revenue growth in 2007, with sales rising to $1.57 billion from $1.53 billion in 2006.

Similarly, Atmel performed poorly with 2007 revenue dropping slightly to $1.64 billion from $1.67 billion in 2006. The difference between Atmel and its two suitors, though, is that Microchip and ON Semi remain profitable and, as a result, had higher valuations on the equity market.

Atmel's weak operating profit of 3.2 percent for 2007 contrasts sharply with 11.3 percent for ON Semi and 17 percent for Microchip over roughly the same period. Atmel's selling, general and administrative (SG&A) costs for the last two years were also higher than those of ON Semi; Microchip's SG&A costs were higher than Atmel's during the same period.

It's expected that Microchip and ON Semi would move quickly to slash Atmel's costs, especially its R&D expenses, which were about 17 percent of sales in 2007 compared to 9 percent of sales at ON Semi and 12 percent at Microchip.

"We believe the acquisition provides opportunity to improve operating margins at Atmel," Sanghi said. "The combined IP portfolio of both companies will also help us accelerate time-to-market."

First, though, the suitors must convince Atmel's board to support the transaction. Microchip's Sanghi said he is prepared to sweeten the deal by offering a combination of Microchip shares and cash.

That combination could prove more attractive to Atmel's institutional investors, who hold 69 percent of the company's outstanding shares and have seen the value of their investment drop by more than half over just the last year.