How Much Cypress Semiconductor Might Fetch in a Buyout

May 30, 2019 by Jon C. Ogg

Source: Thinkstock
It seems that the world of semiconductors still will have fewer companies dominating the landscape in the years ahead. After years of industry consolidation, Cypress Semiconductor Corp. (NASDAQ: CY) became the latest takeover target in the rumor mill. A Bloomberg report noting that the company is exploring strategic options sent shares higher Wednesday. Options include a potential sale of the company, after it reportedly received outside takeover interest.

The big question that shareholders should be asking is how much of a premium Cypress Semiconductor might fetch in a buyout.

Investors should know that Cypress Semiconductor is not new to the buyout rumor mill. A shareholder group pressured it to seek a buyer back in 2016. It has been a public stock dating back to the mid-1980s and has been floated among potential takeout names over the years. The reality is that every chip player, large and small, has been the subject of a potential merger rumor over the past 20 years or so.

After a 12% gain to $17.25 a share on Wednesday, the semiconductor maker has a 52-week trading range of $11.75 to $18.59. This was a more than a $20 stock back in 2011. It has been a dividend payer since 2011 as well, and its cumulative dividend payments since initiating a dividend have been close to $3.35 per share.

Cypress Semiconductor is not deemed an expensive stock by most measures. That said, the 2019 consensus (Refinitiv) forecast is for revenues to drop 11% to $2.21 billion in 2019 and then to recover by over 5% to $2.33 billion in 2020. The $1.36 in earnings per share is projected to drop to $1.10 per share in 2019 and then to recover to $1.22 in 2020.

The company competes directly against Microchip, NXP, Texas Instruments, Silicon Labs, Macronix, STMicro and Renesas. Merrill Lynch shows it having no customers worth 10% or more of the business, and that it is still ahead of realizing the fruits of several operational changes.

Note that NXP Semiconductors N.V. (NASDAQ: NXPI), which had been a takeover target of Qualcomm Inc. (NASDAQ: QCOM) before the deal was blocked by China, just a day earlier announced that it was acquiring the Wi-Fi and Bluetooth assets of Marvell Technology Group Ltd. (NASDAQ: MRVL) for a purchase price of $1.76 billion. Marvell has a $14.7 billion market cap, versus almost $26 billion for NXP. Cypress has a mere $6.4 billion market cap, which would make it be acquirable for dozens of public technology companies.

The following Wall Street analysts have chimed in with views about the potential buyout value and the standalone valuation of Cypress Semiconductor.

Morgan Stanley upgraded the stock to Equal Weight from Underweight after the news, but the $11.50 prior price target was raised to only $15.50.

A Credit Suisse note from mid-May outlining company-by-company exposure to Huawei showed that Cypress Semiconductor likely has only a 1% to 2% exposure to the Chinese tech giant. And a mid-May report from Morningstar (with a $14 target price) noted that it still has significant exposure to China through
industrial and consumer markets, and that competitors like NXP, STMicro, Infineon and Renesas are well capitalized and already have strong positions in the auto segment. Morningstar also noted that the Internet of Things (IoT) trend has attracted a plethora of competitors that might make it difficult for Cypress Semiconductor to capitalize.

Merrill Lynch’s Vivek Arya has a Buy rating on the shares, but his $20 price objective did not change after the news. With no formal statement from the company, Arya noted that Cypress Semiconductor has attractive assets in auto and the IoT segments with model leverage and good valuation all adding up to being a top small-to-mid-cap pick. Arya further noted that acquiring the stock would offer a buyer diversification and incumbency, and it would be attractive in the software, developer and distribution channels to other larger suitors. The report said:

Over the last few years multiple semi vendors have become too dependent on smartphone/Apple markets or have narrow products, and as they hunt for new/adjacent markets in autos/IoT, CY could be an attractive option in our view. … In the past few years the microcontroller (MCU) and WiFi industry has seen substantial consolidation.

Craig-Hallum has been positive on Cypress Semiconductor this year. In late 2018, it maintained a Buy rating but lowered its target from $25 to $20, but that target was cut to $18 in February, and it was raised back up to $20 in late-April.

Susquehanna Financial has a Positive rating on the stock, and the analyst noted that the company could be worth as much as $25 per share in a takeover.

SunTrust maintained its Hold rating and $17 price target, but the firm has noted that Cypress Semiconductor could fetch $19 in a takeover.

The Refinitiv consensus analyst estimate was $18.15 ahead of the move.

Cypress Semiconductor’s shares were up another 1.8% at $17.55 on Thursday, and the 11.5 million shares that had traded hands by 1:00 Eastern Time was still only about half of the prior day’s “rumor mill” 24.2-million-share day.


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