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Severance benefits cause friction in Microchip/Atmel merger

Posted: 12 Apr 2016 ?? ?Print Version ?Bookmark and Share

Keywords:merger? microchip? atmel? OEM? severance benefits?

The severance packages represent just one issue in what is overall a huge and challenging acquisition for Microchip.

The Atmel deal promises to vault Microchip into third place among microcontroller vendors, behind Renesas and NXP which itself recently closed a merger with Freescale. To make the merger a financial success, Sanghi aims to find about $170 million a year in so-called synergies cost cuts or profit improvements rising to $200 million in four years.

By contrast, NXP said it aims to find $500 million a year in synergies in its merger with Freescale. Avago said it targets as much as $400 million in its merger with Broadcom and recently announced 300 million in cuts. The two deals were among more than $100 billion in mergers announced last year.

Microchip CEO

Figure 2: Microchip chief executive Steve SanghI

Atmel is the "worst performing company we ever bought," Sanghi said.

Microchip had operating profits that were 29.5% of sales in its December quarter compared to 9.4% for Atmel. "For the March quarter Microchip got better and their results were terrible," he said.

Atmel revenues in 2015 were down 17.6% from 2014. In the March 2016 quarter revenues were down 31% from the same quarter in 2015, he said.

"This company is atrophyingit's in trouble and a lot of improvements need to be made to bring it up to the Microchip level in technology, management and sales," Sanghi said.

It's too early to say how many layoffs and other cuts will be needed, Sanghi said. "The integration plan is not done, definitely there will be some cuts, there are no acquisitions without cuts [but] we are four days into the merger and Atmel gave us no access prior to the closing, so the plan is [still] being developed," he said.

In January, Atmel reported quarterly sales of about $261 million, short of estimates of $266-$286 million. Atmel blamed the short fall on weaker than expected billings, primarily in Asia, as distributors reduced inventory levels due to uncertainties associated with the acquisition process.

"Sales dropped the day after Microchip made its offer because some people don't want to do business with them, and they were worried about products and people being cutthe faucet is [being] turned off," said the employee who contacted EE Times.

Specifically some distributors and large OEMs such as Honeywell cancelled orders with Atmel, the employee said. Microchip does not pay distributors fees at the same level as Atmel, and Microchip often chooses not to do business with large OEMs who drive down prices in negotiations, the employee added.

"Honeywell is one of our biggest customers and they said they are not going to talk to us anymore. Definitely distributors are selling inventory but not refreshing it," he said.

An employee contacted by EE Times in Atmel's touch sensor group, said his unit has had no issues with OEM customers so far. The touch-screen sensor group does not generally work with distributors.

"None of the customers we are working with have stopped buying Atmel products," he said on condition he not be identified. "We've been reaching out to them, and none of them have come back to us with concerns," he said.

"Overall, I think employees are a little beat down [after months of pending merger deals] but in general people are excited to have clarity and direction now we are beaten down, but optimistic," he said.

Sanghi said Microchip works with top OEMs and distributors. "Somebody is trying to justify their bad performance," he said of the employee who talked about Honeywell and distributors cancelling orders.

Microchip works with all the major distributors and OEMs, Sanghi said. "We do business with every single large OEM in automotive, computing, communications and industrial including the customer you are namingaround the globe we have more than 92,000 customers," Sanghi said.

"Pricing is tough to make a profitable company sometimes you have to fight for pricing and you don't get the order," he said.

"Look at who has grown better, Atmel or Microchip. They were 2-3 times our size 20 years ago, and now we are twice their size and our profits are much larger," he added.


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