Imagination Faces Challenge Over MIPS Bid From CEVA

by: 451 Research: Inorganic Growth

By Tejas Venkatesh

It may not be all done and dusted for the proposed acquisition of semiconductor IP company MIPS Technologies (NASDAQ:MIPS) by Imagination Technologies (OTCPK:IGNMF), as MIPS has received an unsolicited better offer. CEVA (NASDAQ:CEVA), one of the oldest developers of licensable IP cores for communications, mobile handsets and multimedia, is offering $75m, compared with the $60m Imagination put on the table.

This shouldn’t affect the separate deal MIPS put in place to sell its patents for $350m to Bridge Crossing, an acquisition vehicle formed by patent consortium Allied Security Trust. What CEVA is bidding for is the operating MIPS business (with $83m in revenue and 160 employees), plus full licensing rights to the MIPS architecture, including just those patents directly related to MIPS products.

From a product portfolio perspective, CEVA is a very good fit for MIPS. Formed in November 2002 by the merger of two veteran chipmakers, DSP Group and Parthius Technologies, CEVA has focused steadily on developing and licensing digital signal-processing (DSP) cores for mobile, consumer and networking devices. Having shipped one billion CEVA-powered devices in 2011, it is one of the major suppliers of DSPs, alongside much larger rivals such as Texas Instruments and Freescale. Its 200 licensees include Broadcom, Intel, Samsung, Sony, ST-Ericsson and Toshiba.

Given all that, it’s something of a shock to see that CEVA’s recently announced revenue for Q3 2012 was just $12m, down 19% compared with the same quarter last year. CEVA says the economic climate impacted licensing revenue, but claims robust demand for DSPs to be used in next-generation products. It also claims to be making significant inroads into the lucrative 3-D smartphone space, with design wins from Huawei, Lenovo (OTCPK:LNVGF), Samsung (OTC:SSNLF) and ZTE (OTC:ZTCOY). And while CEVA may be smaller than MIPS in terms of revenue, it does have $156m of cash in the bank and no debt.

There’s little growth nowadays in sales of single-function DSP devices, although demand for DSP capabilities isn’t going away – it’s just becoming embedded in broader devices, such as system-on-chip (SoC) products. Hence the motivation behind CEVA’s bid for MIPS, which, despite a fairly late start in the SoC device sector compared with its primary rival ARM Holdings (NASDAQ:ARMH), has at least been pushing in that direction since 2006. Combining with MIPS would give CEVA a boost in its existing markets and a chance to broaden out from simple DSPs. Imagination, whose shares fell 3% on the news, may well come back with a revised offer of its own.