Attractive Tech Takeover Deal
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
According to a press release issued on December 26, 2012, BCD Semiconductor Manufacturing (NASDAQ: BCDS) has agreed to merge with Diodes, Incorporated (NASDAQ: DIOD) in an all-cash deal valued at about $150 million. Despite the small size and low profile of this deal, it may offer attractive returns for investors who wish to partake in the wave of consolidation that has swept the semiconductor industry. Since cash-rich Diodes may soon become the target of takeover speculation in its own right, this deal could be worth more than the sum of its parts.
About BCD Semiconductor and Diodes
Shanghai-based, Cayman Islands-incorporated BCD Semiconductor Manufacturing is a niche producer of a wide range of electronic components, circuitry and diode-based products. Its signature products include adapter circuits, integrated circuits, and AC/DC and DC/DC switches. These components are used in a tremendous variety of everyday electronic products, including power adapters, phone chargers, laptops, tablets, HDTVs, set-top boxes and many others. The company employs about 1,300 people and lost $2.8 million on $137.4 million in revenue in 2011.
Plano, Texas-based Diodes is a small but healthy manufacturer of transistors, logic circuits, power management devices, drivers and other components of computing and electronic equipment. It maintains a robust direct sales force and cultivates close relationships with electronics, automotive, and communications-device manufacturers. Diodes employs 4,500 people and earned $23.2 million on $613.8 million in revenue in 2011.
How the Deal Is Structured
Diodes has agreed to purchase all of BCD Semiconductor Manufacturing's outstanding shares for $8 per share in cash. Relative to BCD's closing price of $7.70 per share on January 18, this represents a premium of about 4 percent. Relative to BCD's closing price of $3.98 on the final trading day before the merger announcement, this represents a premium of about 100 percent.
Since the merger announcement, the stock has traded in a tight range between $7.40 and $7.80. It appears that lingering uncertainty about the valuation that the deal assigns to BCD as well as ongoing legal investigations are collectively preventing BCD's stock price from reaching $8 per share. In the coming weeks, investors would do well to watch the stock closely and jump in on news-related drops.
Since BCD is incorporated in the Cayman Islands, the deal technically involves the company's American Depository Shares. Each ADR is equivalent to six common BCD shares. Individuals who hold actual over-the-counter BCD common shares will be entitled to receive $1.33 cents per share. Since there are few OTC shares outstanding, this is not expected to have a major impact on the deal. Barring any unforeseen complications, the deal should be finalized by April of 2013.
As is customary in the aftermath of an unexpected buyout announcement, several law firms have opened "investigations" into the circumstances surrounding the deal. Although these have the potential to develop further, the prospect of a class-action shareholder lawsuit is relatively remote.
The investigations allege that Diodes's offer price substantially undervalues BCD Semiconductor. Documents related to the investigation note that the offer values BCD at just four-fifths of its current annual revenue. Further, these documents note that the company's stock traded above $11 per share shortly after going public in February of 2011.
While both of these assertions are true, they may be beside the point. Although few analysts follow BCD, most are in agreement that it should not be valued at more than $9 per share. Given its recent losses, it is reasonable to expect the company's revenues to stagnate or shrink in the coming years. As such, an admittedly unorthodox valuation of less than 100 percent of current annual revenues may be warranted in this case.
Long-Term Outlook and Growth Prospects
Despite the remote possibility of a lawsuit, news-related drops could still create short-term buying opportunities for investors interested in profiting from this merger. Over the longer term, this merger appears likely to provide Diodes with substantial cost savings as well as considerable access to new markets. In particular, the company currently has weak exposure to the analog semiconductor space.
The merger and its resulting synergies will help Diodes achieve such exposure and may enable it to turn a formerly-unprofitable semiconductor manufacturer into a thriving division. After the initial merger-related charge, Diodes might substantially increase its bottom-line earnings and make itself more attractive to one of the larger players that operates in the space.
For instance, Marvell Technology Group (NASDAQ: MRVL) has aggressively sought to increase its market penetration and has a mountain of cash with which to pursue this goal. Like Diodes, Bermuda-based Marvell is a leader in the LED and WiFi spaces. However, the company has relatively little exposure to the unglamorous but profitable analog semiconductors market. Diodes may well hope to be snapped up by a company like Marvell after increasing its own attractiveness by purchasing BCD.
Given the small size of the two companies involved, an obligatory regulatory investigation is not expected to affect the terms of this deal. However, its outcome still hinges on formal regulatory approval as well as a positive vote from a majority of BCD Semiconductor's shareholders. If nothing arises to delay or scuttle the merger, it should close by the end of the first quarter of 2013.
mthiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!