Technology

Why Analysts Like the Cypress and Spansion Merger So Much

Cypress Semiconductor Corp. (NASDAQ: CY) and Spansion Inc. (NYSE: CODE) announced Monday after the close that they had entered into a definitive agreement to merge in an all-stock, tax-free transaction valued at about $4 billion. In another apparently favorable deal, the acquirer is seeing its shares rise along with the company being acquired. It turns out that the analyst reports seen by 24/7 Wall St. have been very favorable regarding this merger news.

In the deal, Spansion shareholders will receive 2.457 Cypress shares for each Spansion share. The shareholders of each company will own roughly 50% of the post-merger company. The new company will have an eight-person board of directors consisting of equal halves of Cypress and Spansion directors. The company will be headquartered in San Jose, Calif., and will be called Cypress Semiconductor Corporation.

The new combined company will be the global leader in NOR flash memories and in SRAM memories. The merger gives Cypress a growth path that may put the stock back on track to its all-time high near $25 a share posted in April 2011.

The merger is expected to result in cost savings of $135 million annually within three years and to be accretive to non-GAAP earnings within the first year after the transaction closes. The combined company will continue to pay the $0.11 quarterly dividend Cypress now pays.

The expected timeframe for the merger to close is in the first half of 2015, following approvals from regulators in the United States, Germany and China. The boards of directors of both companies have unanimously approved the transaction.

Sterne Agee noted a few points regarding the merger:

  • With Cypress in the driver’s seat CEO TJ Rodgers rolls out a long-term roadmap
  • If the company can pull the deal synergies ($135 million) to year 2, the combination could drive roughly $1.50 in earnings per share (EPS) and an over $18 valuation.
  • The companies have a 45% to 55% market overlap, and Cypress can drive a better scale of combined businesses with cost reductions in selling and administrative expenses, which in turn would drive synergies

Credit Suisse maintained its Neutral rating but raised its price target to $12 from $9.50. The analyst firm further commented in its report on the merger:

We view the deal as positive for Cypress as it brings the company to scale ($2 billion annualized revenue vs. ~$700 million), enables synergies at the product level (ie Embedded Memory and Embedded MCU) and offers complimentary end market exposure – post-close Cypress will have 57% I/A/I exposure, and expects to be a top 5 Auto semi provider. Base case, annualizing C3Q14 pro forma for the combined company implies revenues / earnings per share of $2.0 billion / $0.56, including $135 million synergies takes earnings per share to $0.98 (+$0.42), and against CY16 50%-ile Cypress revenue of $908 million and Spansion CY16 Street estimate of $1.4 billion at target 20% Operating Margin implies $2.3 billion / $1.37.

Other analysts made calls on the merger as well:

  • Pacific Crest upgraded shares from Sector Perform to Outperform with a price target of $15, also saying the deal gives it needed operational scale with consolidated revenue of over $2 billion.
  • J.P. Morgan cautions that the merger could take a full three years for the company to realize some of the $135 million in cost synergies they predict.
  • Topeka Capital Markets raised shares from a Hold rating to Buy with a price target of $13.
  • S&P Capital IQ raised its rating to Buy from Hold and raised its target price to $15, because it sees significant scale and complementary product offerings and opportunities in the areas like automotive and industrial. The firm positively views the $135 million in potential annual synergies and expects Cypress to benefit from a lower cost manufacturing footprint. The deal is seen closing in the second quarter and the annual dividend is considered safe despite the higher share count after the deal.

Shares of Spansion were up nearly 24% to $28.30, approaching the noon hour Tuesday. The stock has a consensus analyst price target of $23.75 and a 52-week trading range of $12.12 to $28.58. Spansion has a market cap of roughly $1.75 billion.

Cypress shares were up 17% to $12.21. The consensus analyst price target is $10.40, and the 52-week trading range is $8.04 to $12.42. The market cap is almost $2 billion.