“[S]emiconductor comapnies and their balance sheets are being managed too conservatively relative to the lower risks they now face,” he writes. “[I]f semiconductor boards don’t rationalize balance sheets to reflect their lower risk profiles, then LBO firms may step in and do it for them.”
Lipacis lists five stocks with “the most opportunity for upside through more efficient use of their balance sheets:
He thinks those companies could substantially raise their valuations via a combination of share repurcases and the issuance of debt; he says potential upside to the shares could be as high as 20%-40%.
Yesterday morning, I did an interview on stage at the Micro Ventures conference in San Jose with Sumit Sadana, the senior VP for strategy and business development at Freescale (NYSE:FSL), which is days away from closing the buyout that will take the company private. Sadana said he believes that there are far too many semiconductor companies, and that the industry needs to consolidate. The industry is maturing, he says, and entering a period of slower growth and higher costs; survival is going to require scale.
The chip business hasn’t actually done much consolidation to date, unlike, say, the enterprise software industry, where Oracle (NYSE:ORCL) has served as a catalyst for considerable consolidation. The semiconductor companies can either do it for themselves or wait for the private equity players to act as consolidators; but it seems clear that the chip landscape is over-populated. And as Prudential points out today, more than a few companies look ripe for the picking.