Ron,
One could conclude that middle tier companies will be vulnerable to
more competition from top tier companies, especially if they purchase
technology from lower tier companies, but to say that middle tier
companies are at risk of going out of business is a bit far fetched.
I think the writer was inferring that low tier companies are more
attractive than middle tier companies because they don't have
fabrication facilities and other fixed assets that may not be
needed. Why pay for something you don't need? That's how I read it,
anyway.
I think there are serious flaws in the article though. The writer
based his conclusion solely on sales and I think one has to also look
at market capitalization, book value, intellectual property rights,
uniqueness of technology, and desirability of the combined product
mix when trying to identify firms that are possible takeover
targets. When one looks at this additional criteria, VLSI could be a
takeover target even if they are in the middle tier as Marren said.
Listed below is the market capitalization, price to book, price to
sales, cash, fixed assets, and cash as a percentage of market cap for
the companies classified in the article as being in the middle tier.
Dollars in millions
Ticker Mkt cap P/B P/S Cash Plant/Equip Cash/Mkt cap
AMD $2,419 1.2x 1.0x $307 $3,952 12.7%
ATML $1,277 1.7x 1.3x $229 $1,078 17.9%
CY $699 1.3x 1.3x $198 $ 396 28.3%
IDTI $572 1.1x 0.9x $213 $ 453 37.2%
LSI $3,220 2.0x 2.5x $458 $1,144 14.2%
VLSI $696 1.3x 1.0x $282 $ 377 40.5%
Based strictly on this data, VLSI, IDTI, and CY are the most likely
takeover candidates IF another company wants their technology. LSI,
ATML, and AMD have much higher market capitalizations and fixed assets
and this makes them less attractive unless more capacity is needed. I
think this is unlikely in today's environment although a lot depends
on their capacity utilization. An exception might be if the company
being acquired has unique facilities that the other company needs,
but without looking deeper into this I can't make a judgement on that.
Notice also that VLSI has the lowest investment in fixed assets and
the highest percentage of cash per market cap of these companies. The
cash figure is astounding and alone makes VLSI a takeover target.
A description of VLSI, IDTI and CY is listed below. I'll leave it up
to one's interpretation if each company's technology is desirable but
I will say that VLSI has less dependency on the desktop computer
market than IDTI and CY and this would seem to make them more
attractive than the other two companies.
VLSI Technology designs, manufactures and markets custom and
semi-custom integrated circuits for a range of applications in the
wireless communications, networking, consumer digital entertainment
and advanced computing markets.
IDTI designs, develops, manufactures and markets high
performance semiconductor products and modules for communications
equipment, desktop and distributed computing systems, desktop
personal computers, and office automation markets.
CY designs, develops, manufactures and markets Static Random
Access Memory (SRAM) and digital and mixed-signal integrated circuits
for a wide range of markets, including telecommunications, computers,
data communications, and instrumentation systems.
VLSI is trading at a cheap valuation, is a leader in systems on a
chip technology, and has a leading position in the ASIC, GSM, and
wireless communications semiconductor markets. The stock is trading
at 1 x sales and could very well be a target of one of the top tier
companies even if they are in the middle tier according to Marren.
Assuming a conservative 50% premium over Friday's 15 1/4 closing
price, a buyer could probably get VLSI for about $1 billion. When
you consider that the stock would normally trade at around 1.5 to 1.8
times sales under better stock market conditions, the fixed assets
are basically free at a $1 billion price. The acquiring company
could even sell some of the facilities that they don't need. I
should also note that VLSI has one of the most state of the art
fabrication facilities in the world, recently bringing on 0.2 micron
silicon. This also makes them attractive from a takeover perspective.
I didn't buy VLSI because I think they are a takeover target and I
don't advise anybody else to do that. However, when one considers
VLSI's technology, position in the marketplace, and valuation, they
might very well be attractive to a larger company that wants to
quickly enter the wireless, ASIC, and systems on a chip business and
at the same time acquire world class fabrication facilities and a
lot of cash as a percentage of their investment.
Dan |
