Elroy and Sam, I stumbled across this conversation regarding the acquisition of SIMO. I'm not certain if you've seen it, so I'll paste it here. It seems encouraging.
By the way, this is my first post since I became a member back in the days of Zeev Hed. I never had anything meaningful to add.
OK, let's see if this works. I'm having a problem with the margins and indentation. My apologies in advance if it comes out garbled:
At the Credit Suisse 26th Annual Technology Conference held on November 29, 2022, Steven G. Litchfield, Chief Financial Officer and Chief Corporate Strategy Officer of MaxLinear, responded to questions from Chris Caso of Credit Suisse relating to the pending acquisition of Silicon Motion, as set forth below.
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| Chris Caso: | I understand. We'll move on to the acquisition, Silicon Motion acquisition, and I get the perception, and I don't cover
MaxLinear, but I do get the perception that that's been a little controversial. And maybe you could start with the rationale
behind it, why it's a strategic fit and why you elected to do that acquisition. | | | | | Steve Litchfield: | No, look, and it was very exciting opportunity for us. We announced the acquisition in May of last year or May of this
year. So, exciting. The rationale itself, so for those of you unfamiliar with Silicon Motion stores controller company,
been around for a number of years. There's a lot of similarities frankly between them and MaxLinear. Founder led company,
grown it over the last 20 years. Very impressive product offering. We announced it in May, I think some of the, well, let me
tell you the rationale first.
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| So first of all, the storage market is a big market. It's growing double digits every year. Expected to see that
continue. And that's across all of the storage controller markets. And so that address is the client side, like
consumer enhance, but it also gets into industrial automotive, it gets into data center, enterprise storage.
These are big, big markets that are growing quite a bit. That was the attraction from us. We don't have a
huge storage exposure. We sell into the enterprise storage markets today with several of those players. We
clearly were talking about optical. Optical, we sell into the data center. So there's a couple of overlaps.
Now neither of us, us, or Silicon Motion have huge exposure just as a percentage of our revenues to the
enterprise market. But it's a place that we both see as a big growth potential for the company and we think
we can benefit from that.
I guess the second thing I would mention is scale. This was a big rationale behind the deal itself. All of
you know the consolidation that's happened in semiconductors over the last several years. We’re
competing every day against companies like Broadcom, like Marvell that are 4, 5, 6 times bigger than us.
We need to have the scale. It's always been important to the semiconductors. The acquisition that we
made, Silicon Motion was doing two to three times more wafer volume than we are doing at TSMC.
That'll give us tremendous amount of leverage from a cost standpoint on wafers, on back end,
assembling test. But also on the front end, as I think about R&D dollars. We're both investing heavily
in IPS for next generation products. We have a five nanometer solution for our optical products.
Naturally, some of those IPs will be needed when Silicon Motion develops their next generation five
nanometer product as well.
So now we can leverage that across a much bigger business. Taking a $1 billion business, moving it
to $2 billion, just the scale alone gives us a lot more capabilities to pursue other things. Long term,
naturally we want to continue to grow organically, but we'll also want to do more acquisitions down
the road and continue to roll out more semiconductor companies.
Financially, it's a very accretive transaction. The structure of the deal was a little over 80% cash, little
less than 20% stock. It'll be done in term loan B, term loan A debt facilities. And that'll be syndicated
out close to the time of close maybe to hit some mechanics of the transaction. The only thing we’re
waiting on is SAMR approval through China. So antitrust approvals in China are taking close to 12
months right now. Some cases more, some cases less. But as a general rule, that's about the time and
that's kind of dictated our view of us closing mid next year.
| Chris Caso: | And what's your accretion targets for that acquisition? | | | | | Steve Litchfield: | So we announced, at the timing of the deal, accretion of about 25%. And I think for most of you that
were familiar, I think if you plugged the models together, there was a hundred million dollars of synergies
and the accretion levels were much higher than the 25% that were announced. That was just kind of
baking in some cushion. Clearly when we announced the deal in May, part of the controversy that you
mentioned was why this deal, why now? I talked through the rationale itself, but I think there was some
part of the concern at the time was why the consumer market. Consumers were slowing down in April
of last year, April and May. And then we were putting some additional leverage. |
So first of all, look, if you look at any... We weren't necessarily buying the company to be in the consumer
market per se. But that being said, it drives tremendous amount of volume, tremendous amount of
scale. And so we'll be able to benefit from that. With regard to the leverage, look, you've seen us do deals
historically that we've put leverage on the company. We were very quick to pay down that debt. We
would intend to do that here as well. The leverage we announced or that we estimated to be at close
would be a little less than four times levered at close. And then 18 months beyond that, we'd be below
three times levered.
So that's still the focus today. Maybe one other point to note, as many of you knows, interest rates
have moved up. When we announced the deal, the interest rate was on or about four and a half
percent. Today, that's probably running closer to seven and a half, maybe as high as eight if we were
to close today, which we're not. So as we syndicate that deal out, call it next spring, we'll see where
that interest rate lands. But the deal is still very accretive and very exciting long term for MaxLinear
in growing the company.
| Chris Caso: | And so it sounds like that there was enough cushion in the accretion targets when you announced the
deal that even though we've got higher rates, softer consumer markets, you still feel you could hit those
targets. | | | | | Steve Litchfield: | We do feel very good about that. And in fact, I'm often mentioning, I think in a downturn you can get
in there and you can make some corrections. We can make realizing more synergies during tough times,
tough markets versus when times are good, it's a little more difficult to realize some of these synergies.
And maybe I'll just hit on the synergies briefly. There was $100 million of synergies. $30 million were
expected to come from COGS and $70 million from opex. And that 30 million you can imagine at what,
$2 billion of revenue, a little less than a billion dollars of COGS getting 30 million of synergies. I think
that's a pretty conservative number hopefully. Especially as we look out going forward and you're seeing
suppliers' utilization go down, I think we'll see some more pricing leverage on that front. So very
confident that we can realize the 30. On the 70 side, it's a little less than what we would normally target.
Now, we don't have as much overlap in the business. But that being said, I think we're more than
confident that we can hit the 70 and potentially even higher than that. |
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