Why Does Wall Street Hate the ON/AMIS Deal?

Includes: AMIS, ON
by: Eric Savitz

Thursday, ON Semiconductor (ONNN) announced a deal to acquire AMIS Holdings (AMIS) for $915 million in stock. Wall Street seems to hate the deal.

Before I explore why, let me give you the details. Terms of the deal call for AMIS holders to receive 1.15 ON shares for each share of AMIS. At the time the deal was announced, the value of those shares was $10.14. On completion of the deal, ON holders will own 74% of the company, with AMIS holders getting 26%. The deal is expected to close in the 2008 first half. On says it has found $50 million in cost synergies in 2009. ON notes that the combined company will have more than $2 billion in trailing 12 months revenue, and more than $500 million in EBITDA.

ON also said that in connection with the deal, it is boosting its stock buyback plan to to million shares from 30 million shares.

So, here the thing. ON Semi shares have crumbled on the news. Thursday, the stock dropped 28 cents, or 3.3% to $8.54, after trading as low as $7.78. Friday, the stock is off another 46 cents, or 5.4%, to $8.08, bringing the total slide to 8.4%. The value of the deal to AMIS holders has dropped to $9.29.

The obvious question: Why does the Street not like this deal?

It turns out there are several reasons.

  • ON is growing more rapidly than AMIS. Lehman’s Romit Shah estimates 2008 growth of 8% for ON Semi, and 2% for AMIS.
  • The deal raises the net debt on the company’s balance sheet by $150 million to $950 million.
  • Shah notes that big chip acquisitions “historically do not improve shareholder value.” He says that over the last 10 years, there have been 29 deals worth $500 million or more, with an average return post-deal of -22% relative to the S&P 500 after one year, and -37% after two years.
  • Manufacturing integration, Shah notes, “is a significant challenge due to the multitude of proprietary processes (high voltage, low noise, high frequency).

That said, Shah, actually maintains his Overweight rating on the stock, and says the stock looks cheap at under 10x EPS.

But other analysts are less sanguine. J.P. Morgan’s Christopher Danely writes that he doesn’t get the logic of doing this deal. “AMI has exhibited little to no growth over the past year in both sales and earnings and its operating margins are 7.3%, well below ON’s operating margins of 18.2%,” he writes. “Although we believe ON will be able to improve the profitability of AMI through cost-cutting, we also believe the company’s growth will slow and operating margins will decline, and we would note AMIS stock was trading at roughly half the multiple of ONNN stock. As a result, we believe the acquisition should be a net neutral to negative for ONNN stock.”

He’s certainly right about that last part.