- Analog Devices acquires Hittite Microwave in a $2 billion deal.
- The deal adds to margins, earnings, and improves Analog's growth profile, triggering shareholder enthusiasm.
- I am a buyer on 10-15% corrections, paying a 17 times normalized multiple for the improved profile of this still-cyclical player.
The deal is applauded by investors, and I understand why. Hittite improves the growth profile, margins and earnings per share of Analog Devices in a rather fair deal. Future revenue opportunities are arising as well.
With the deal, Analog is boosting its growth profile, which could boost its valuation multiple. I am a buyer on significant dips in this firm, which operates with a rock-solid balance sheet, while it shows stable operating margins throughout the economic cycle.
The Deal Highlights
Analog Devices announced that it has entered into a definitive agreement to acquire Hittite Microwave for $78 per share in an all-cash deal.
Hittite Microwave designs and manufactures high-performance integrated circuits, modules, subsystems and instrumentation of RF, microwave and millimeter wave applications.
The price tag represents nearly a 29% premium over Hittite's closing price on Friday. The deal values Hittite's equity at roughly $2.45 billion, yet the company holds $492 million net of cash, which reduces the effective purchase price to little less than $2 billion.
The deal, which is approved by the board of directors of both companies, is expected to close near the end of the third quarter of the fiscal year of Analog Devices, if all goes to plan.
Implications of the deal
Analog Devices expects to finance the deal both through cash at hand and short-term debt financing, as the addition of Hittite will be accretive to non-GAAP earnings per share. Unfortunately, the company failed to quantify the degree of accretion.
The strength of Hittite in RF, microwave and millimeter wave technology complements Analog's own RF and signal conversion expertise. This should allow Analog to provide better and more complete solutions to its customers across various markets. With the deal, Analog will gain 500 workers worldwide.
For the calendar year of 2013, Hittite reported revenues of $273.8 million, on which it net earned $70.0 million. The $2 billion effective price tag values operations at 7.3 times annual revenues and 28-29 times annual earnings.
Valuing Analog Devices
Analog Devices ended its most recent quarter with $4.8 billion in cash and equivalents, while total debt of $872 million is very manageable. The nearly $4 billion net cash position allows Analog to acquire Hittite, in a move which will cut its net cash position in half.
For its latest fiscal year, Analog reported revenues of $2.63 billion, on which it net earned $673 million. Trading around $55 per share, equity is valued at $17.4 billion, which does value net operating assets at $13.4 billion excluding the financing impact of the Hittite deal. This values Analog's own operations at roughly 5.1 times annual revenues and 20 times earnings.
Investors in Analog Devices currently receive a quarterly dividend of $0.37 per share, which translates into a dividend yield of 2.7%.
Updating The Market
On the 20th of May, Analog reported its second-quarter results. For the current third quarter, Analog foresaw a 1-5% increase in third quarter revenues, an outlook which the company now reiterates.
Earnings were seen between $0.60 and $0.64 per share at the time, as Analog reiterates its earnings guidance as well. This came as no surprise to the investment community, with analysts forecasting Analog to post third-quarter earnings of $0.63 per share on revenues of $716.1 million.
Shareholders Like The Deal
Investors are clearly excited about the deal, sending shares of both companies firmly higher. Analog's equity valuation jumped by more than $800 million following the deal, bigger than the roughly $540 million premium paid for Hittite, resulting in an incremental value jump of $1.3 billion following the deal.
The jump in the valuation is significant. Analog Devices did cite expected accretion in gross margins, operating margins and earnings per share, but did not quantify this effect. The tie-up should, however, also bolster the capabilities of the group, driving revenue synergies in the industrial, communication and automotive markets as well. Notably, the broader exposure to high-end markets like satellites and military radar could be very interesting.
Just two weeks ago, I last took a look at the prospects for Analog Devices following its second-quarter earnings release. At the time, I concluded that the very strong financial position and stable operating margins offered a great deal of safety, warranting the current valuation.
To boost appeal, Analog had to grow revenues consistently throughout the economic cycle, in my opinion. With the acquisition of Hittite, Analog is improving its growth profile, after Hittite roughly quadrupled its revenues over the past decade.
The deal is just a start, and I believe investors are already pricing in most of the good news. Yet, an acquisition which adds more than 10% of total revenues is significant and shows Analog's commitment to grow.
I will keep the stock on my radar, but won't jump the deal bandwagon to scoop up shares at elevated levels. I am a buyer in the $45-$50 price region, which values shares at around 17 times pro-forma GAAP earnings. This is for a firm which has just improved its growth profile significantly, while being able to reap synergies as well in the coming years.