A curious thing about the ATML acquisition.

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Atmel is being acquired by Microchip Technology. Shareholders can find evidence of the dubious quality of the acquisition quite easily.

Microchip Technology announced its pending acquisition of Atmel in January for $3.5 billion. I have doubts about the merits of the acquisition. Ironically, MCHP inadvertently flagged ATML as a dud while touting its own masterful abilities as an astute acquirer of other businesses during a December 1 slideshow.

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In my homework on how MCHP’s other acquisitions have fared, I discovered an interesting nugget. Apparently, I am not the first person to question their prior acquisitions. On December 1, 2015, MCHP went so far as to release a slide show presentation of just how well its acquisitions have worked.

They show organic net sales have expanded at an 8.3% compounded rate for the past six years, and 6.3% for the past three years. Meanwhile, including acquisitions, net sales expanded at 17.3% per year for the six year period and 13.1% per year over three years.

In the next slide, MCHP takes a victory lap by showing itself atop a league table of other semiconductor companies. MCHP, with its acquisitions, grew net sales more than three times the industry average during the past six years. Who sits at the bottom of the list? None other than Atmel with a dismal -0.4%.

Just over six weeks later, MCHP decided ATML wasn’t so bad after all. MCHP claims that the acquisition will provide $170 million in “synergies”. But even that optimistic  number represents a return on capital of less than 4.9%.

The downside risk is evident: Both companies have very high exposure to Asia (over 40% of sales), and revenues at ATML have dropped by almost 17% during 2015. Meanwhile, MCHP is enlarging its business by 47%, expanding debt from $2 billion to $2.8 billion, and expending nearly all of its $2 billion in cash to finalize the deal.

In fairness, MCHP generates over $500 million in operating cash each year, so replenishing the coffers won’t take long. The debt is growing, but can be easily serviced. But shareholders would be better served by a share buyback than the purchase of a business in decline.

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