Advanced Energy To Acquire Embedded Power Division Of Artesyn

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About: Advanced Energy Industries, Inc. (AEIS), Includes: MKSI
by: Donovan Jones
Summary

Advanced Energy Industries has announced a deal to acquire the Embedded Power Division of Artesyn for $400 million in cash and assumed liabilities.

EP makes application specific power supplies for a range of markets.

AEIS is diversifying its business and seeking to expand its market opportunities with this acquisition.

Quick Take

Advanced Energy Industries (AEIS) announced it has agreed to acquire the Embedded Power business of Artesyn Embedded Technologies for $400 million.

Artesyn’s EP operations consist of the design and development of application-specific power supplies for demanding applications.

With the deal for Artesyn EP, AEIS is continuing to execute on its diversification strategy while seeking to expand its addressable markets.

Target Company

Tempe, Arizona-based Artesyn was founded in 1968 and its EP wing is tasked with the engineering and manufacturing of application-specific power supplies for embedded industrial power and medical applications, hyperscale data centers, and future telecom infrastructure.

Management is headed by CEO Jay Geldmacher, who has been with the firm since 2013 and was previously executive vice president of Emerson Network Power's Embedded Computing & Power operations.

Below is an overview video of Artesyn’s digital DC-DC converter:

Source: Artesyn

The company’s primary offerings include AC-DC and DC-DC power supplies, accessories, design services, software as well as Open Computer Platform [OCP] solutions, including open-frame and enclosed models, DIN rail power supplies and external power adapters, rack-mounting bulk front end units, and highly configurable modular power supplies.

Acquisition Terms and Financial

Advanced Energy disclosed the acquisition price and terms as $364 million in cash plus the assumption of $36 million in liabilities.

AE expects to pay for the deal through existing cash and $350 million in new debt.

Management summarized the expected effects from the transaction as follows:

Accelerates earnings growth with over $20 million of expected annualized synergies, driving projected earnings accretion of over $0.80 per share in 18-24 months and targeting to reach long-term accretion of over $1.50 per share, on a non-GAAP basis.

A review of the firm’s most recent 10-Q filing indicates that as of March 31, 2019, AEIS had $353.7 million in cash and marketable securities and $234.8 million in total liabilities, so it appears the firm has ample resources combined with the new debt to close the transaction.

Free cash flow for the three months ended March 31, 2019, was $3.0 million.

In the past 12 months, AEIS’s stock price has fallen 21.33% vs. MKS’s (MKSI) drop of 29.8%, as the chart below indicates:

Source: Sentieo

Positive earnings surprises have occurred in ten of the last twelve quarterly reports. However, the two negative surprises have occurred since Q2 2018 and earnings have dropped markedly since then, as the chart shows below:

Source: Seeking Alpha

Analyst sentiment in recent earnings calls has dropped since late 2017, as the linguistic analysis chart shows below:

Source: Sentieo

Commentary

AEIS is acquiring Artesyn’s Embedded Power [EP] business as part of a diversification strategy.

As Yuval Wasserman, president and CEO of AEIS stated in the deal announcement,

Artesyn EP fits perfectly into our diversification strategy by adding a broad set of new growth verticals, industry leading power technologies, deep customer relationships and a world-class team. AE’s semiconductor customers will also benefit from the expanded capabilities, broadened product offerings and increased stability and scale. With the anticipated immediate accretion and future synergies of this acquisition, we are positioning AE for accelerated profitable and sustainable growth.

Seeking Alpha contributor Stephen Simpson wrote a prescient piece recently suggesting ‘AEIS should use its cash on hand to improve the business - whether that means acquiring other complementary semiconductor component operations or acquiring footholds in other promising verticals like power and control systems for industrial and healthcare equipment.’

AEIS states that the deal triples its addressable market to $7.5 billion and will provide access to potentially lucrative growth verticals such as data centers, industrial and medical, and 5G wireless.

Investors appear to agree and have pushed the stock price up 7.2% since the deal announcement.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.