Today's trading in Atmel (NASDAQ:ATML) appears to be a case of impatient and distracted investment managers in a soft market abandoning a perfectly logical expected buyout scenario. Merger and arbitrage investors pushed up Atmel to a high of $10.50 on June 22 and have since abandoned their support for the stock, allowing an unusual opportunity for investors. The stock has dropped a quarter of its value since that date.
Atmel makes small processors called microcontrollers, which are used in a long list of devices. They use only two architectures (ARM and AVR), which makes Atmel less research and development cost intensive than most companies in this space. They are also an older company in the world of semiconductors, and therefore have outdated and inefficient fabrication plants that an acquirer with more modern manufacturing capacities could easily use to improve operations. These are some reasons why in 2008 Microchip Technology (NASDAQ:MCHP) and ON Semiconductor (NASDAQ:ON) found Atmel to be an attractive acquisition target and attempted to acquire them in a failed hostile takeover attempt.
But that was during the financial crisis when most company managements resisted being acquired at discount prices. Now it's 2015 and Atmel's stock is up 60% above that 2009 offer of $5, as the semiconductor space is seeing an unprecedented record breaking year with mergers and acquisitions. Avago Technologies (NASDAQ:AVGO) acquired Broadcom (NASDAQ:BRCM) in a deal worth 67 billion. Intel (NASDAQ:INTL) bought Altera (NASDAQ:ALTR). Texas Instruments (NYSE:TI) and NXP Semiconductors (NASDAQ:NXPI) had to fight each other for the opportunity to acquire Freescale Semiconductor (NYSE:FSL). Freescale accepted one third of NXP's shares and the companies boasted 500 million a year in cost savings from the synergies.
Meanwhile, chip companies by themselves are struggling this year and Atmel is no exception. Microcontroller sales are down twenty percent year over year. There's weakness is computing, handsets, and general industrials, affecting Atmel's performance. Atmel's closest competitors are seeing the same thing. Managements have turned to cost saving synergies from acquisitions for growth.
On May 6, Atmel reported that its 56 year old CEO, Stephen Laub, was retiring at the end of August. He has been with the company since 2006, the year the company's independent board publicly fired the founder, George Perlegos. A couple weeks after Laub's retirement announcement (May 21) he sold a third of his shares for $8.70-8.80.
Then, something interesting happened. A week after his sale, according to an SEC filing in early June, Atmel's Compensation Committee amended and restated its Senior Executive Change of Control and Severance Plan. In other words, the company's Board of Directors amended their golden parachutes in the event of a sale.
On June 4, FBR Analyst Christopher Rolland put out a report calling Atmel its top acquisition candidate in the crowded semiconductor space. He pointed out that at the going 2015 pace, one third of the companies will be acquired. He further noted that Atmel's earnings per share can be 109% higher through synergies with a potential acquirer. At a $10 buyout, that would make it worth just around ten times earnings.
But the most interesting thing happened on June 8. A Reuters article by Linda Baker citing "three people familiar with the matter" stated that Atmel had actually hired Qatalyst Partners to explore strategic alternatives, including a sale. Those people "familiar with the matter" most likely included Atmel's management.
That's when I started paying close attention. I have been following this company for a few years and nothing interests me more than an attractive company with an independent Board of Directors who wantsto sell their company. In most cases, managements resist sales due to all the perks of being an independent publicly traded company (i.e. receiving endless stock options). But with a two and a half year languishing stock and a CEO bailing out in an industry that needs to consolidate to maintain growth, the Board of Directors clearly has a different mindset than they did in 2008.
Unfortunately, when this news came out, the stock was already near $10, which was not much of a trading opportunity given that analysts were guessing a buyout would fetch around $10.50. However here's where things get most interesting.
The stock started falling all through July and the chip companies reported weak numbers, signaling that Atmel was about to report weak numbers as well. And they did, which may explain why Stephen Laub, the chief executive, decided it was time to retire and immediately sell some shares. But he hedged his bet and kept two thirds of his shares (worth 29 million) when he had every excuse to sell it all before his weak report in July.
On the earnings conference call on July 28, management refused to mention anything about exploring strategic alternatives. Had they done so, I may have questioned possible ulterior motives for leaking a buyout narrative. Instead they kept quiet - which is exactly what you would expect from a company that is in serious negotiations. They meanwhile reported weak guidance and analysts dropped their average price targets to the mid 9's, seemingly forgetting the likelihood of an acquisition (as if it were supposed to happen immediately). FBR's Rolland, who was most prescient about Atmel's buyout opportunity, maintained his $11 price target. [Incidentally, Stephen Simpson of Kratisto Investing wrote a good Seeking Alpha article after Atmel's earnings miss calling a $10.50 sale "quite reasonable."]
Atmel's microcontrollers are at the forefront of the "Internet of Things" space, which is an exciting growth opportunity in the chip space, and Atmel also has great growth opportunities in the automotive and data center industry. The list of potential acquirers for Atmel is long. Large acquirers like Intel, Qualcomm, and Texas Instruments are clearly on the prowl. Then there's Analog Devices, Nvidia, Avago, NXP and Infineon, who are all potential suitors and much bigger than Atmel. But then there's even comparable size companies to Atmel whose managements want to avoid being acquired themselves, like Microchip, On Semiconductor, Cypress Semiconductor, and Microsemi Corporation, who could do share agreements similar to the Freescale/NXP deal. There's so many possibilities that it's foolish to think a company in this space that is openly willing to sell will not get an acceptable offer. It is more likely that Atmel is dealing with a bidding war than not receiving an acceptable bid.
Once and awhile fund managers overlook the obvious, creating rare trading opportunities with low risks and high rewards. Companies in the semiconductor space that are being acquired eliminate 10-20% of costs, and double the acquired company's earnings per share. They are being bought using low 3% debt financing. All signs point toward Atmel being serious about being acquired in an industry where competitors now require the cost saving synergies of acquisitions for growth. Acquisition deals don't happen overnight, but in the $8-$9 range Atmel here is a screaming buy.
Additional Notes:
- Despite the cheap stock price, there is significant high risk and high implied volatility option purchases for August and September, suggesting the possibility that a buyout is in the works.
- On August 10, Steve Skaggs, CFO, stated the following, answering a question about where Atmel was in regards to a new CEO. He stated: "Our board is actively engaged in a process to fulfill its duties to search for a new CEO. Our current CEO has announced his plan to retire by the 31st of August and you can expect, you know, an announcement prior to that time. That's really all I'm at liberty to say."
o I find it curious that Skaggs felt the need to add that the Board's CEO search was happening, in part, to "fulfill its duties." It sounds like he is involuntarily implying that this is an uninteresting chore. I can think of two possible reasons for this. Either the CEO has already been selected (and maybe it's him), or a buyout is about to make this matter meaningless. Or it's both.
o He also vaguely stated that we should expect "an announcement" rather than "the announcement" and quickly cuts himself off. Again, I wonder if this was him involuntarily revealing that the announcement may have nothing to do with a new CEO.
- Skaggs has also stated in recent investor conferences that he does not see the current M&A trend abating and that there are great scale advantages to running a larger corporation.
Disclosure: Author is long ATML
