Atmel: Merger Arbitrage Opportunity Par Excellence

The Offer

On Wednesday, October 1, ON Semi (ONNN) and Microchip Technology (MCHP) sent a letter to Atmel (ATML) outlining their all-cash $5 a share bid, which is led by Microchip and represents over a 50% premium to Atmel's closing price of $3.36 on Friday, Oct. 25. The acquisition would be financed in part by the sale of Atmel's nonvolatile memory and radio frequency and automotive businesses to ON Semi, the letter said. Although not a condition to the offer, Microchip said it intends to sell Atmel's Application-Specific Integrated Cicuit business after the acquisition is complete. Microchip said there is already a third-party interested in acquiring it.

The Street's Reaction 

Initially, Atmel's shares soared 32.6%, or $1.07, to $4.35 per share but pulled back to current levels on the Street's irrational concerns. In fact, Friday's close at $3.36 is lower than the share price of $3.38 prior to the announcement of the offer. This is completely irrational; we rarely see merger arb opportunities with such limited downside risk and a potential upside of over 50%.

The first concern is financing for the deal. But Microchip President and Chief Executive Steve Sanghi reassured Wall Strett that the company has $1.6 billion in cash on its balance sheet, which means there shouldn't be any stumbling blocks to completing the $2.3 billion transaction. In fact, with On Semi's participation, the financing is as certain as one gets in today's market.

Another concern of the Street's is the willingness of the Atmel Board to accept such an offer. The letter said that Atmel had met with Sanghi last month to discuss the potential acquisition. But Atmel "appears unwilling to consider a transaction at this time under any circumstances."

The current arbitrage spread on Atmel is over 50%, and this is considerably higher than the median 15-20% spreads today. Such a spread warrants a further look into the deal's potential.

The Truth of the Matter – Deal to Happen

Steven Lanb, Atmel chief executive, met with Steve Sanghi, his Microchip counterpart, on September 5 to discuss a takeover by Microchip but the meeting did not lead to negotiations. Steve Sanghi asked that his company and advisors be allowed to perform due diligence, but he did not provide a formal offer at the time. Anyone has worked tech M&A knows that companies would be foolish to open their books to a competitor without a formal offer on the table.

Now that there is a formal offer, the prospects of a deal are much more certain. The steps that have been taken in recent weeks suggest the seriousness of Atmel's board:

1)      Atmel hired Morgan Stanley and Credit Suisse as financial advisers. No rational company pays such Investment Banking fees to simply reject an offer. Thus, the concern about Atmel's "unwillingness" is unfounded.

2)      Atmel's Board met on Friday, October 17 to review the offer. They are still deliberating and are expected to announce a decision this coming week. If they were going to decline the offer, they would not have spent a considerable amount of time reviewing the offer.

The 52-week high is $5.04 per share. So, there is no rational justification not to accept the offer with the hopes that the share price will increase above this level when "the market bounces." The Board knows that a shareholder proxy fight would occur if they do not accept the offer. I am confident that the majority of shareholder's would rather lock in over a 50% gain in today's market than sit and wait. Thus, even if the board does not approve the offer, the shareholders will push to get it through. I'm a strong buyer of Atmel up to $4.00 per share and look forward to receiving a healthy return in an unhealthy market.

Disclosure: Long ATML

Comments

[flashguy:]

This is a horrible write-up if I've ever seen one. To say that ATML would never pay banking fees unless it was going to accept the offer it's ridiculous and naive. The board is OBLIGATED to hire someone in order to protect itself in case of litigation -- it's their fiduciary duty to have a legal basis for rejecting the offer and that includes getting a fairness opinion from bankers.

look, if this is the depth of the analysis required to determine the likelihood of a deal, the stock would be trading with zero spread. You can't possibly believe that you have an edge with this kind of analysis. You're in for a very bad surprise this week... people were saying the exact same thing about SNDK. look at it now.

2008 Oct 27 07:43 AM

[Steve Alexa...:]

Careful on this one. I think the possibility of Atmel rejecting the bid is very high.

2008 Oct 27 09:57 AM

[articleread...:]

ATML how many shares do insiders own?

2008 Oct 27 11:43 AM

[Jae Jun:]

I prefer to enter into mergers once all the approvals have been obtained. Mitigate risk by just watching from the sideline until the deal is most probably set to finalise.

2008 Oct 27 01:13 PM

[Stockwatche...:]

I agree with this article. These guys would have a serious shareholder battle if they declined the offer. The stock has not seen $5 per hsare in a long time. And, Sanghi is making it very attractive by demonstrating flexibility in terms of stock and cash, which kills one potential excuse.

2008 Oct 27 10:04 PM

[Luck-o-the-...:]

....and they declined

2008 Oct 29 04:57 PM

[flashguy:]

of course they declined. this was a horrible arbitrage. see earlier comments above. this author needs to get on here and explain where he stands now.

2008 Oct 30 08:14 AM