Maxim Integrated Products - Appealing Valuation After Acquiring Volterra Semiconductor

| About: Maxim Integrated (MXIM)

Shares of Maxim Integrated Products (NASDAQ:MXIM) are seeing a modest correction after the developer and manufacturer of analog circuits announced the acquisition of Volterra Semiconductor (NASDAQ:VLTR).

The strategic acquisition occurs at a fair valuation, especially when taking expected synergies into account. Given the solid balance sheet, the fair valuation and solid dividend payments, shares of Maxim offer appeal after a recent sell-off.

The Deal

Maxim Integrated Products announced that it has entered into a definitive agreement to acquire Volterra Semiconductor. Maxim will pay $23 per share for Volterra, which represents a 55% premium compared to Wednesday's closing price.

The deal values Volterra at roughly $605 million. Excluding Volterra's net cash position of $155 million, operating assets are valued around $450 million.

Volterra's portfolio increases Maxim's leadership position within integrated power management and adds a strong management team. Volterra is a leader in the high-density power management solutions business, developing integrated solutions for enterprise, cloud-computing and networking markets.

The timing of the deal is perfect despite a 55% premium. Shares of Volterra were trading as high as $34 in spring of 2012, before falling to lows of $12 in April of this year.

CEO Tunc Doluca commented on the rationale behind the deal, "Maxim Integrated is known for its highly integrated solutions. With Volterra, we will strengthen our position in the enterprise and communications markets. We add a very talented team and leading-edge proprietary technology in high-current power management solutions, which further diversifies our business model."

For the calendar year of 2012, Volterra generated revenues of $168.0 million, up 7.7% on the year before. Net income totaled $22.8 million, up 10.7%.

The net price tag of $450 million values Volterra's operations at 2.7 times annual revenues and at roughly 19-20 times annual earnings.

The deal is expected to be immediately accretive to GAAP earnings per share, excluding transaction costs. The deal is subject to normal closing conditions, including regulatory approval, and is expected to close in the December quarter.


Maxim ended its fourth quarter of its fiscal 2013 with $1.20 billion in cash, equivalents and short-term investments. The company operates with $505 million in total debt, for a net cash position of around $700 million.

Full-year revenues came in at $2.44 billion, up 1.5% on the year before. Net earnings rose by 17.6% to $454.9 million.

Trading around $28 per share, the market values Maxim at $8.1 billion. Factoring in the net cash position of the firm, operating assets are valued around $7.4 billion. This values operating assets of the firm at 3.0 times annual revenues and 16-17 times annual earnings.

Maxim Integrated Products currently pays a quarterly dividend of $0.26 per share, for an annual dividend yield of 3.8%.

Some Historical Perspective

Long-term shareholders in Maxim have seen poor returns. Shares peaked around $85 per share during the internet bubble and it has gone slowly downhill from there. Shares gradually fell to levels in their low-teens in 2008.

Shares have gradually re-gained lost ground, driven by the solid dividend, and hit highs of $33 earlier this year. After a recent correction shares are currently exchanging hands at $28 per share.

Between Maxim's fiscal year of 2010 and 2013, revenues have increased by a cumulative 22% towards $2.44 billion. Net earnings almost quadrupled to $455 million in the meantime.

Investment Thesis

Investors in Maxim Integrated Products are not convinced about the deal. The 55% premium implies that Maxim is willing to spend $200 million more to gain control of Volterra compared to its stand-alone valuation. Maxim's own shares fell a buck following the announcement, lowering its market capitalization by $300 million in a weak market.

Yet the deal seems more than fair. Maxim will pay 2.7 times annual revenues for Volterra's operating assets, in line with its own valuation at 3.0 times annual revenues. The price tag at 19-20 times earnings is only slightly more expensive with its own valuation at 16-17 times annual earnings.

Maxim expects to achieve $15 million in operating synergies following the integration of both firms. Assuming statutory tax rates, incremental earnings following the deal could increase by some $33 million per annum, valuing the business at 13-14 times incremental earnings.

With the deal, Maxim strengthens its position in the market for low-energy chips. Demand for these chips, which use less energy, has been increasing as consumers use more mobile devices. The power management market is rapidly growing within the wider analog chip market.

As such, the valuation seems fair and the almost 4% sell-off seems overdone, although this is partially caused by the tough trading session. Maxim has a strong balance sheet, pays out fat dividends and boosts returns to shareholders even further by repurchasing its own shares. Combined with a fair valuation, the recent correction might provide investors with an interesting entry opportunity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.