Shares of Zarlink Semiconductor Inc. (ZL) jumped on Tuesday after the Ottawa-based company said it was buying privately-held Legerity Inc. for US$134.5-million in cash.
The company, formerly Avanced Micro Devices Inc.’s (NYSE:AMD) communication products division, focuses on voice integrated circuits and has nearly 500 patents, according to Raymond James analyst Sera Kim.
The deal is consistent with Zarlink’s strategy to try and dominate in its target niches and should be good for long term growth, she said in a research note.
However, given the absence of a significant cash balance after this deal, investors may choose to sell their Zarlink shares as it may no longer be viewed as a takeover target.
Ms. Kim maintained her “outperform” rating and US$2.75 price target on the stock.
Cormark Securities analyst Susan Streeter said the acquisition comes as no surprise, while raising her price target to US$2.20 from US$2.
While the acquisition appears positive in terms of products and profitability, it does not negate challenges for Zarlink’s core business, Ms. Streeter said in a note to clients. The use of cash also increases the chances Zarlink will look to raise more money, she added.
ZL 1-yr chart: