Prudential on QEDI deal:
- PMC-Sierra has announced a definitive agreement to acquire Quantum Effect
Devices (QEDI-75 3/4*, not rated) for $2.3 billion in stock. PMC plans to
issue 0.385 shares for each Quantum Effect share, representing a 25% premium,
based on last nights closing prices. The acquisition is expected to be
accounted for as a pooling of interest. The deal does not contain any collars
and has a $64 million termination fee. QEDI's 100 employees are to join PMC as
a new business unit, headed by its current president and CEO Tom Riordan.
- We believe that the pricing on the deal was reasonable and should be neutral
to PMC’s 2000 earnings. PMC is paying roughly 50 times 2000 revenues. Given
the expected synergy and PMC’s very high success rate of integrating previous
acquisitions, we believe that the deal is attractive to shareholders of both
companies. Management indicated that the deal would be neutral to PMC’s 2000
earnings. We expect more detailed financial guidance to be given tomorrow,
during the company’s June quarter earnings release conference call.
- QEDI is a leading provider of MIPS processors, an open architecture
processor that has become very pervasive in communications systems. We believe
that by adding this technology to PMC’s arsenal, the company will be able to
significantly expand its addressable market and thwart the potential threat of
its fixed solution products being replaced by programmable processors. QEDI’s
annual revenue run rate is roughly $45 million, which PMC believes it can grow
to $1 billion within five years. In addition to the companies technical
synergies, we believe they also have many customer synergies. One obvious
example is Cisco (CSCO-62 5/8, not rated), which is a greater than 10%
customer for both companies.
- We view PMC as the premier networking communication play and one of our
long-term favorites. The company has a leadership position in broadband
infrastructure communications chips. This announcement further supports our
belief that PMC will be one of a few long-term winners in the communications
semiconductor space. We reiterate our Strong Buy rating and 12-month price
target of $300. |
