Nvidia Buying Portalplayer; Who Knew Last Week?

Includes: NVDA, PLAY
by: Eric Savitz

Well, Nvidia (NASDAQ:NVDA) has been in acquisition talks, as rumored - but not with the party everyone thought. While the whispering had Intel (NASDAQ:INTC) potentially buying Nvidia, in response to Advanced Micro Devices (NYSE:AMD) recent acquisition of ATI, Nvidia has caught the Street by surprise, announcing plans to buy PortalPlayer (NASDAQ:PLAY) for $13.50 a share in cash, or $357 million, or $161 million net of Portal Player’s cash position. The biggest question about the deal could be this: given the sharp rise in PortalPlayer shares last week, did news of the deal leak?

In a note this morning, Craig Berger, an analyst with Wedbush Morgan Securities wrote that the deal is “part of Nvidia’s overall handheld product strategy, likely combining PortalPlayer’s application processor with Nvidia’s graphic processor for mobile devices such as PDAs, game players and handphones. ”

Berger says the deal “comes as a surprise to us,” in part because “there are other semiconductor firms that offer more technology for less money.” He says PortalPlayer “has limited semiconductor IP compared to other firms” and asserts that there are “so many beaten down chip stocks trading at 1x sales including Genesis Micro (GNSS), Zoran (NASDAQ:ZRAN), PixelWorks (NASDAQ:PXLW) and Sigmatel (SGTL).”

“Reasons for the acquisition could include 1) there may be some attractive new product technology in PALY’s roadmap (wireless, next generation processor) that interested Nvidia that we are not fully aware of, or 2) Nvidia thinks it has a better chance of penetrating Apple iPod (video) products if it owns and integrates PortalPlayer’s technology,” he writes.

PLAYIn the release announcing the deal, PortalPlayer Chairman Richard Sanquini says that his company “spent the past several months extensively exploring our strategic options,” and that “the advantages offered by the Nvidia acquisition are the most compelling.”

The release says the deal price is a 19 percent premium to the 20-day average closing price through Friday; but it is just a hair above Friday’s closing mark of $13.36. Sounds like a no-premium deal - except that it clearly seem like someone saw this coming. On October 26, PortalPlayer reported third quarter earnings, and the stock fell the next day, falling 40 cents to $11.08 on October 27. But the stock rose all five sessions last week, including a gain of 5% gain Friday; for the week, the shares were up nearly 21%. (See the chart.)

So you have to conclude that 1) in this case there is a good reason for a deal that seems to be at almost no premium and 2) someone is either a very good guesser or else the deal was leaked.

This morning, PortalPlayer shares are down - down - 8 cents to $13.28. Nvidia is up 73 cents at $33.33. The buyer is up, the seller is down…it’s an upside-down deal.

Meanwhile, Genesis, Zoran, PixelWorks and SigmaTel are all fractionally higher.

ADDENDUM: Adam Benjamin, an analyst at Jefferies & Co., asserted in a note this morning that the deal improves Nvidia’s positioning relative to Apple, where PortalPlayer has been a supplier. “We believe this deal immediately improves NVDA’s competitive positioning at Apple as it eliminates one competitor and positions NVDA directly beside BRCM (Broadcom) on the current video iPod board. We believe NVDA will likely port PALY’s firmware over to its application processor to provide a single chip solution.”

Benjamin says the deal could be interpreted negatively for both Broadcom and SigmaTel.