October 4, 2010...In making a $430 million cash tender offer to acquire programmable logic supplier Actel Corp., analog and mixed-signal chip vendor Microsemi Corp. is seeking to broaden its product offerings to appeal to core customers in the aerospace, defense and industrial markets, according to company executives. But the company is likely to kill some Actel product lines, they said.
In a conference call Monday (Oct. 4) following the announcement of the tender offer, James Peterson, Microsemi's president and CEO, said Microsemi would trim some "non-productive" Actel product offerings aimed at commercial markets where Actel lags behind programmable logic market leaders Xilinx Inc. and Altera Corp. While he stressed that Microsemi would not kill all Actel commercial products, he said the company would take a hard look at products that don't compete effectively with the big players' offerings. Peterson did not mention any specific products that could be discontinued.
"We will not continue to dilute profitability by chasing the two big competitors in the marketplace today," Peterson said. "That's not Microsemi's game."
While many observers were caught off guard by the proposed acquisition, Peterson and other Microsemi executives stressed that the two companies' common strengths in the military and aerospace segments make them an ideal match.
"At the most fundamental level, Actel is the perfect acquisition for Microsemi," Peterson said. "This company has had a long and successful history in the aerospace and defense markets that we at Microsemi know so well."
"The purpose of this deal is not to enter an FPGA market," said Russell Garcia, Microsemi's executive vice president of marketing and sales, in an interview with EE Times. "The purpose is to add breadth and scale to the markets we both play in very well."
Garcia acknowledged that at first glance it might be difficult to spot the synergies between a programmable logic supplier and an analog/mixed-signal chip vendor. But the move makes plenty of sense from the perspective of a chip supplier wanting to offer customers a broader set of products, Garcia said. The acquisition is part of Microsemi's strategy to "move up the value chain to being basically the highest value capability supplier," Garcia said.
"This acquisition allows Microsemi to move up the value curve and supply its defense and aerospace customers with more sophisticated systems level solutions," said Craig Berger, an analyst with FBR Capital Markets, in a report circulated Tuesday morning. Berger noted that the deal would bring Microsemi new product capabilities including aerospace-targeted flash FPGAs, low-power FPGAs, radiation-hardened FPGAs, Actel's SmartFusion FPGAs with integrated ARM Cortex microcontrollers, and other anti-tamper technologies.
80% overlap in customersPeterson said Microsemi and Actel have 80 percent overlap in common customers. Peterson also said Actel dominates in many military and aerospace markets. Microsemi said Actel derives 75 percent of its revenue from the military, aerospace and industrial markets, but a spokesperson for Actel said the company does not break out revenues along those lines.
Berger said Actel derives 46 percent of revenue from the military/aerospace end market, 35 percent from the industrial end market and 7 percent from the communications end market.
The acquisition of Actel, which is pending the results of a $20.88 per share cash tender offer in place for 30 days, would be the most expensive and ambitious in a string of acquisitions Microsemi has made over the course of the past six months. Last month, Microsemi acquired the assets of VT Silicon, a maker of multi-band RFIC solutions for the mobile wireless broadband market. In April, Microsemi paid roughly $100 million for White Electronic Designs Corp., a specialist in ICs and modules for defense and aerospace applications. Last year, Microsemi made several acquisitions, including a power product line from Spectrum Microwave, Electro Module Inc., Endwave Corp. and Nexem Inc.
According to Garcia and Steven Litchfield, executive vice president and group president of Microsemi's High Performance Analog Mixed Signal Group, the moves are part of the evolution of Microsemi from a discrete components supplier to a vendor of integrated system solutions."This is not your father's Microsemi," Garcia said.
"Microsemi is building meaningful scale with suppliers and customers as the firm approaches the $200 million per quarter revenue level," Berger said.
Garcia and Litchfield said Microsemi has not really begun to look at what Actel products could be discontinued. But they said Actel's innovative SmartFusion product family of mixed-signal FPGAs with a hard ARM Cortex-M3 processor core and programmable analog blocks fits right in line with Microsemi's strategy.
Actel is ranked fourth in the FPGA market with a market share of about 6 percent. Actel reported revenue of $191 million for fiscal 2009, slightly below Lattice Semiconductor's $194 million. Both companies trail Xilinx and Altera, which reported revenue for their most recently concluded fiscal years of $1.8 billion and $1.2 billion, respectively, by a wide margin.
Little impact on overall FPGA marketIan Ing, an analyst for Gleacher & Co. in San Francisco, said that because of Actel's relative size the impact of its acquisition by Microsemi would be small. He said the company has "tried to make a go" of competing with Xilinx and Altera in commercial markets with its flash-based FPGAs, but that he expects Microsemi to pull back on those efforts, concentrate on Actel's strengths in military and aerospace, and treat Actel as a "cash cow." Ing said Microsemi would probably maintain some level of investment in Actel's antifuse FPGAs.
While an acquisition of Actel and subsequent discontinuation of some product lines wouldn't have a material impact on the programmable logic market, it would shake up a status quo that has been entrenched for many years. Actel, founded in 1985, has never been a dominant supplier in the market, but it has been one of only four standalone companies to survive in a market where dozens have failed. Roughly 50 companies have sold FPGAs since they were invented in the late 1980s, and nearly all have exited the market, folded or been acquired.
In addition to the four established programmable logic vendors, there are currently several promising startups, including Achronix Corp., Tabula Inc. and SiliconBlue Technologies Corp. Some established semiconductor firms like Atmel Corp. and Cypress Semiconductor Corp. also control a very small percentage of the programmable logic market.
The value of Microsemi's $20.88 per share tender offer represents a premium of 30 percent over Actel's closing price last week. On news of the tender offer, Actel's stock gained nearly 31 percent Monday to close at $20.95.
Peterson also revealed that Microsemi was not the only suitor for Actel, though he did not name any other interested parties. The terms of the definitive agreement with Actel call for Actel to pay Microsemi a "break-up fee" of about 3 percent, or about $17.5 million, in the event that the acquisition is not completed, he said.
FBR analyst Berger said he was aware of two other bidders for Actel, including a private equity firm. Berger said he does not expect any of the other interested parties to raise its bid for Actel, noting that the other suitors had ample time to raise their pre-existing bids before shares of Actel went higher than $20.
Another reason that Microsemi was attracted to Actel was Actel's relative success in the Russian market, Peterson said. Actel has penetrated the Russian market and done well, he said, Microsemi has not been as successful. "There is tremendous opportunity in Russia," Peterson said. "Like any other transaction, we are looking to them to help us open doors in other markets."