Synaptics: Great Acquisition, Great Operational Momentum, But Await A More Attractive Entry Point

Jun.11.14 | About: Synaptics Incorporated (SYNA)


Synaptics acquires Renesas SP Drivers at very favorable relative valuation multiples.

As the company reports very strong momentum for the final fourth quarter.

Shares offer appeal, but await a pullback after a 40% run-up over the past few weeks.

Synaptics (NASDAQ:SYNA) had some very positive announcements to make for investors on Tuesday after the market close. The company announced the acquisition of Renesas SP Drivers while hiking the guidance for the current quarter.

I am a buyer on significant dips, after missing out the huge rally in recent weeks which is largely justified. I am hoping for the +40% momentum to reverse a bit in the coming days or weeks, hoping to scoop up some shares around $70 per share.

The Deal Highlights

Synaptics announced that it has signed a definitive agreement to acquire all of the equity of Renesas SP Drivers, a leader in small and medium-sized display driver ICs, also known as DDICs, which are used in smart phones and tablets. The company's key customers include LG Display, Samsung Display and Sharp, among others.

Synaptics will pay roughly $475 million for the company, based on a $515 million enterprise value. As Renesas is a Japanese company the transaction will be executed in Japanese Yen assuming a conversion rate of 102 against the US dollar. At the moment, Renesas employs about 350 workers after being founded as a joint-venture as recent as 2008.

Implications Of The Deal

With the acquisition of Renesas, Synaptics expects to increase its addressable market opportunity by a factor of 1.5 times. The deal also accelerates the roadmap for touch-and-display driver integration, enabling platform-level solutions for certain segments of the mobile markets, while reinforcing its position in touch as well as DDIC.

Renesas posted revenues of $650 million for the year ending on March of 2014. This values the company at just 0.8 times annual revenues. Cash flows of $100 million imply that Synaptics pays little over 5 times in cash flow to acquire the business. These are very favorable valuation multiples. Before announcing the deal, and after backing out the net cash position, Synaptics own assets traded over 2 times annual revenues.

Combined Synaptics anticipates further growth and operating leverage after merging the operations. As such the deal which is set to close in the fourth quarter is expected to add immediately to non-GAAP earnings.

Raising The Outlook

Besides announcing the deal, Synaptics was furthermore very upbeat about the fourth quarter earnings outlook for the quarter which ends on June the 30th.

Revenues are now seen between $300 and $310 million after the company previously anticipated revenues to come in between $275 and $295 million. This implies that revenues will now increase by 30 to 35% on an annual basis.

Valuing Synaptics

Synaptics ended the third quarter with $391.5 million in cash and equivalents. The company has no debt outstanding which will not result in any financing difficulties for the deal. As a matter of fact, Synaptics has already arranged $300 million in committed debt financing to finance the purchase.

Based on the latest guidance update, Synaptics will report full year revenues of $933 to $943 million driven by the strong performance of mobile and PC products. Earnings for the first three quarters of the year came in at just $12.2 million after the company took $57.6 million in acquisition-related charges.

Excluding for this and assuming normal statutory tax rates, net earnings would have come in around $60 million. As such ¨normalized¨ earnings for the year might come in around a $100 million given the strong seasonal fourth quarter.

Factoring in a big jump towards $78 per share in after-hours trading, Synaptics is valued at around $2.8 billion. The company will operate with a roughly net flat cash position following the deal. Revenues are seen around $1.6 billion per annum at the moment, while earnings are likely to see further accretion above ¨normalized¨ levels of a $100 million.

Implications For Investors

Shareholders have been very enthusiastic about the deal, sending shares 18% higher which adds more than $400 million to the company's valuation on the back of the strong guidance and the $515 million deal.

Estimating the true sustainable profit rate on the back of the combination and momentum is hard to do, but I am willing to peg normalized earnings at about $150 million per annum for now. Growth will continue with security devices, to unlock mobile phones and other devices, are increasingly becoming more important. Note that Synaptics is a supplies to Samsung which uses them in its Galaxy line-up of phones and tablets.

The market has already priced in a lot of good news on the back of the announcements. This is after shares have already jumped up significantly at the end of May following rumors that the company would announce this acquisition. Ever since shares have risen some 40% or a bit more, which factors in a great deal of value creation which is created by the move and the strong momentum.

I must say that I am really enthusiastic about the deal as well, and hope that momentum could reverse somewhat. As such I am hoping and waiting for a momentum reversal to levels around $70 before the fourth quarter results are announced. I do realize that my chances to pick up shares at those levels with a margin of safety are rather slim.

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