You may not have heard of Cypress Semiconductor (NASDAQ: CY), but chances are you use their products every day when you use Bluetooth technology or a touchscreen to navigate your smart phone. On December 1st, the semiconductor company announced plans to merge with Spansion (NYSE: CODE); a company that specializes in designing and manufacturing flash memory microcontrollers used in cars, personal devices, and home appliances.
The two Silicon Valley based tech companies will merge in an “all-stock, tax-free transaction valued at approximately $4 billion.” A press release from Cypress detailed that Spansion shareholders “will receive 2.457 Cypress shares for each Spansion share they own.” In addition, “shareholders of each company will own approximately 50 percent of the post-merger company.” There will be an $0.11 per share quarterly dividend to all shareholders. The deal is expected to close in the first half of 2015.
T.J. Rodgers, the CEO of Cypress who will remain CEO of the merged companies, seemed optimistic about the merge of “two smart, profitable, passionately entrepreneurial companies that are No. 1 in their respective memory markets and have successfully diversified into embedded processing.” He continued, the “combined company will be a leading provider of embedded MCUs and specialized memories.”
John Kispert, CEO of Spansion, also sounded confident about the merge, highlighting the new opportunities for “economies of scale” and “maximum value for shareholders” that would directly result from the merge. Kispert looks forward to reaching new markets and delivering “best-of-breed” solutions.
Although both CEOs seemed excited about the merge, analysts have mixed feelings.
Analyst Ryan Goodman of CLSA reiterated an Underperform rating on Cypress on December 2nd with a price target of $12. Although Goodman likes the deal and believes that the portfolios of Cypress and Spansion will complement each other nicely, he reasons that the cost saving appeal of the merge stemming from “manufacturing transitions to internal fabs” would take until at least late 2016 to transpire due to “long qualification cycles.” Goodman continued, “The stock is already trading at 16x 2016CL PE, and without more meaningful immediate catalysts, we believe upside is limited.”
Out of two stocks that Goodman has rated, he has a +12.1% average return per recommendation.
Separately on December 2nd, analyst Doug Freedman of RBC Capital reiterated an Outperform rating on Cypress with a price target of $15. Freedman voiced confidence in the merger, noting “The merger is clearly putting together two companies that have good product lines and OpEx synergies… We view cost synergies of $135mil annually in a 3-year time-frame as achievable.” He also noted that Spansion “could see a longer-term ramp-down of NOR flash memory” and that Cypress “management has prior experience in SRAM in navigating memory markets that have declining TAMs” and this type of expertise will be beneficial for Spansion. Overall, Freedman believes the merge will “balance sheet actions to reduce debt expense and increase cash flow”
Freedman has a 79% overall success rate recommending stocks with an average return of +21.9% per recommendation.
Analyst Betsy Van Hees of Wedbush maintained a Neutral rating for Cypress Semiconductor on December 2nd with a price target of $12. In an article on SmarterAnalyst, Van Hees notes that the merger is a “great marriage.” She believes that “While the stock had a nice move in AHs trading, we think in the near-term from here, CY shareholders will have to be content with the 4% dividend.” Van Hees continued that the benefits of the merge may take a while to materialize “due to the time needed to complete the transaction, lower OpEx, integrate, and qualify manufacturing to get the scale and move the model towards the impressive LT targets.”
Betsy Van Hees has a 70% overall success rate recommending stocks with an average return of +20.8% per recommendation.
The merge between Cypress Semiconductor and Spansion has a lot of people excited, but is now the right time to Buy?