Infineon plans to acquire US competitor Cypress for 9 bn. euros, the largest investment in the company's history. According to the management's view, as usual there are many "synergies" and "further development potentials" to be found in such acquisitions. But is this optimism objectively justified?
Infineon is offering Cypress shareholders $23.85 per share, a premium of 34 percent over the closing price on May 30 (the acquisition was announced on June 3) and 46 percent over the average Cypress share price over the past 30 trading days prior to June 1. Infineon intends to complete the acquisition by early 2020 at the latest. For this purpose, the shareholders must accept the offer and the responsible supervisory authorities must approve the takeover.
Infineon has recently had bad experience with the latter. The takeover of the Cree subsidiary Wolfspeed for 850 million dollars, announced in 2016, did not take place due to resistance from the US government. At the beginning of 2015, Infineon bought International Rectifier for around three billion dollars, the largest acquisition to date.
"The planned acquisition of Cypress is a major and groundbreaking step in Infineon's strategic development," commented Infineon CEO Dr. Reinhard Ploss on the deal. He expects the positive sales effects of the acquisition to be more than 1.5 billion euros per year in the long term. In addition, he sees an annual savings potential of EUR 180 million. After the transaction, he is aiming for sales growth of nine percent, a segment profit margin of 19 % and an investment ratio of 13 %. According to Ploss, the acquisition will also help to expand Infineon's presence in Japan and the USA, where the chip manufacturer has the lowest share of its total sales. The question is whether this optimism is justified.
In terms of pure figures, Cypress Semiconductor has grown strongly in recent years, primarily thanks to its own acquisitions. In 2018, the group had sales of around 2.5 billion dollars (2.2 billion euros) and earned 355 million dollars. After recent horrendous losses under Silicon Valley's enfant Terrible, former CEO T. J. Rodgers, his 39-year-old foster-son Hassane El-Khoury has successfully focused on the IoT and the automotive industry. The product focus is now on wireless chips for WiFi and Bluetooth, USB, memory (especially NOR flash) and arm-based microcontrollers for industrial and automotive applications.
As far as market expansion is concerned, Cypress generated around 10% of its sales in the USA and around 24% in Japan in 2018. Following the acquisition, Infineon's sales share is expected to increase from 7% in Japan to approximately 11% (Cypress's major customers include Honda and Toyota), but will remain unchanged in the USA. Of course, the 5800 Cypress employees will increase Infineon's R&D footprint and overall presence in the USA significantly. The largest share of Cypress's sales (40% and almost $1 billion in 2018) was generated in China, Taiwan and Hong Kong, where the greatest risks are currently lurking thanks to the trade war between the USA and China and declining growth. Looking at Cypress sales by product, almost 50 % is still flowing into the consumer and enterprise markets, which are also non-strategic for Infineon.
And then there are the arm-based microcontrollers, some of which compete directly with Infineon's XMC family, or in the automotive industry with the TriCore-based Aurix families. We will have to wait and see which harmonization strategy we will see in the controller area after the takeover.
Dr. Ploss likes to emphasize that Infineon's "From Product to System" approach is to offer customers a wider bandwidth, ideally all from a single source. If you look at an automotive application such as ADAS or infotainment, you will actually be able to deliver more chips around the core, a Renesas R-Car H3 type SoC. However, the SoC itself comes from the competition; Infineon does not want to invest here because of the "intense competition of numerous market participants".
Shareholders swallowed the price heavily (Infineon's share price slumped by almost 10% after the announcement). After Cypress was put up for sale, there was interest not only from Campeon, so Infineon simply had to outbid its competitors. The lack of unique selling points, such as International Rectifier's GaN technology, are just as much a risk as the high share of sales in China in the context of a weakening economy as a whole and an imminent US embargo.
Nevertheless: I like the courage to take the next big growth step with the help of this acquisition. If the plans work out, Infineon will not only become larger, but also more profitable. And last but not least: After many years, the German chip manufacturer is moving back into the top 10 of the global semiconductor industry. In view of the strategic importance of semiconductors for our industry in Germany, the takeover is also an important political statement. Business and politics should therefore keep their fingers crossed for Dr. Ploss to crown his already impressive career with a successful Cypress takeover.