Well, I guess it is about time for a contrarian view!
I am not enthusiastic about the deal because it seems to lack synergy. In my view, synergy is the key benefit to consolidation in this highly R&D and capital intensive industry. Acquisitions that are more complementary in nature will have minimal synergy and therefore miss out on this key benefit.
Second, the DD and high end computing segments are not very pretty right now and the rate of growth is certainly questionable. I think I read somewhere that symbios specializes in unix based systems which is also not the place to be as INTC encroaches on the high end market. So I view this market as slow growth at best given INTC's plans. On the DD side competition is very tough and margins will be squeezed for all suppliers. Also, weren't there some announcements last week involving LU in terms of targetting this segment? If so, competition will get tougher not easier.
Third, the deal will not add much to 99 eps. I beleive the $60M in operating profits for 1997 will be materially lower in 1998 (just like for 99% of the companies in this industry) and then, the finanancing cost of the deal will either a) add interest expense if it is debt financed or b) reduce investment income if it is financed with internal cash. Some combination is most likely and the result will be probably only 10-15 cents in incremental eps for the full year. Given that the current estimates of 1.50 or so are too high already, I think the net result will leave estimates virtually unchanged versus current expectations.
Fourth, Until LSI can explain in specific terms what the "high growth" opportunies are with this deal no one will buy into it. The benefits certainly aren't self evident.
It seems the best thing about the deal is the relatively low purchase price relative to sales but given the highly competive nature of this segment and the fact that symbios seems to focus more on unix based systems, this could be a misleading indicator (i.e. sales could actually be shrinking in the future not growing). The only good thing that can come from this is if some analysts can articulate a story about why this is such a great deal for LSI (something that LSI itself has not yet been able to do) so the price will get a short term pop. Given the manipulative nature of these people that is certainly possible but the fundamental benefits of this deal don't show much value creation right now IMO. So far, the big guys have simply used the little bit of momentum created from this announcement as an opportunity to sell (just as has happened for the past 2 weeks). The deal should create a little extra hype on earnings week, however, but I don't expect it to last.
Sorry to spoil the fun, but this is my honest view of what the deal means to fundamentals irrespective of what happens with the trading pattern. It appears that LSI is going to try and remain a stand alone company for the next five years which is disappointing because all the good dance partners will have been chosen by then and LSI will be forced to partner up with some ugly middle to low tier players in an attempt to stay on the dance floor. |
