Why Analysts Have a Mixed View on the Cavium-QLogic Merger

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A bit of what was expected to be seen from the merger was outlined by the companies ahead of knowing the reaction. The first item of gain is an opportunity to drive significant growth at scale in data center and storage markets. Another note showed that the companies would get substantial customer and revenue diversification, versus what they have individually. Cavium projected that it would see $0.60 to $0.70 in earnings per share accretion to its calendar year 2017 non-GAAP earnings.

What investors need to consider here is that the pre-reaction price was represented as being QLogic common stock for approximately $15.50 per share. This merger was shown to be comprised of $11.00 per share in cash, and Cavium was also going to include 0.098 of a share of its own common stock for each QLogic share. The pre-reaction transaction valued QLogic at approximately $1.36 billion, inclusive of approximately $355 million of cash that is on QLogic’s balance sheet.

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QLogic shares were last seen up 9.9% at $14.89, versus a consensus analyst target price of $13.33 and a 52-week trading range of $8.37 to $15.75.

After about 40 minutes of trading on Thursday, Cavium shares were down 15.5% at $40.58. The stock hit a 52-week low of $39.58, something not very attractive at all, and Cavium’s 52-week high is $77.42. The 15% drop gave Cavium an adjusted market cap of $2.32 billion.

Some mergers are good. Some are not. The initial view here is that the merger may not have been Cavium’s best use of cash. After all, the market is nowhere close to 52-week lows, and hitting a 52-week low often is a wake-up call for management as it means that any new shareholders are now losing money on their investment. Comments from management have been included as well.

Syed Ali, president and chief executive officer of Cavium, said of the deal:

Today’s acquisition of QLogic is highly complementary and strategic to Cavium and it creates a diversified pure-play infrastructure semiconductor leader.

QLogic’s industry leading products extend our market position in data center, cloud and storage markets, and further diversifies our revenue and customer base. In addition to the compelling strategic benefits, the manufacturing, sales and operating synergies will create significant value for our shareholders.

Christine King, executive chairman of QLogic, said:

QLogic with Cavium is a winning combination for customers and employees and is financially compelling for QLogic shareholders. The scale of operations of a nearly $1 billion revenue business will allow the combined company to deliver better solutions for customers and create more career opportunities for employees.

Shareholders will benefit from both the immediate premium, as well as the opportunity to participate in the long-term value creation from the combined company’s strong growth prospects.