Analysis: Two rivals bid for Atmel's restoration

Atmel Corp. officials can't say they didn't have enough time to turn around the company. For years, the company struggled with poor revenue growth like most its competitors in the MCU, mixed-signal and ASIC markets and made repeated fruitless efforts to perk up its depressed operating margins.

At present, two of its rivals, looking at the prospect of good returns if they successfully reduce costs from Atmel's bloated operations, have announced a hostile and public $2.3 billion bid for the San Jose, California company after its board of directors rejected an initial offer made during private discussions.

Steven Laub, Atmel president and CEO, may find it difficult to ask shareholders to reject the 54 percent premium offered by Microchip Technology Inc. and ON Semiconductor Corp., which want to help Atmel and boost both revenue growth and profitability in their separate operations.

Tempting offer
"We feel our offer is too compelling not to take it to shareholders," said Steve Sanghi, chairman, president and CEO, Microchip, during a conference call with analysts after the announcement of the offer. "We came to this point after we heard from Atmel that the company was not interested," he added.

Under the terms of the proposed agreement, Microchip would pay $5 per share for Atmel and end up with the bulk of the company's operations, namely its MCU architecture business, which Sanghi estimates had annual revenue of $513 million.

Microchip wants to beef up its MCU line with Atmel's 8- and 32bit products as it sees significant growth opportunities in these areas.

Microchip also will takeover Atmel's $496 million ASIC division, but plans to dispose of the unit possibly before closing the acquisition. "The ASIC business would be considered an asset held for sale if not sold, prior to the conclusion of the main transaction," Sanghi said.

Good time to beef up prod
Meanwhile, ON Semi is able to strengthen its analog business with Atmel's $385 million nonvolatile memory unit along with its RF and auto IC unit, with a reported annual sales of approximately $282 million. The transaction will cost ON Semi about $1 billion, according to Keith Jackson, the company's president and CEO.

"ON Semi is a strong proponent of consolidation in the IC industry," Jackson said. "We will finance the transaction through existing cash (about $410 million), credit facility and other financing. We are confident we will be able to get additional financing even in the current environment," said Jackson.

Sanghi isn't worried about getting financing. The company has enough cash-on-hand to finance the deal without recourse to the credit market or even an equity swap.

Microchip's stable assets
At the end of the June quarter, Microchip reported it had $1 billion in cash and short-term securities. But according to Sanghi, the company has about $1.5 billion. "Furthermore, Microchip has spent more than $1 billion to repurchase its shares just last year," he noted.

"The current market has challenges," said Donald Colvin, executive VP, treasurer and chief financial officer, ON Semi. "Both Microchip and ON generate much cash, and we should be able to get financing even in the current environment," he added.

Both companies 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 past year. At the same time, ON Semi reported lackluster revenue growth in 2007, with sales increasing to $1.57 billion from $1.53 billion in 2006.

Similarly, Atmel had poor performance with 2007 revenue declining slightly to $1.64 billion from $1.67 billion in 2006. The difference between Atmel and its two rivals is that both Microchip and ON Semi remain profitable. As a result, they 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.

Venue to advance operations
"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," he added.

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

The partnership 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 than the past year.

- Bolaji Ojo
EE Times