Deal Reporter
* Room seen for Cypress to increase offer
* Wide disagreement on antirust risks in a Cypress deal
Integrated Silicon Solution’s (NASDAQ: ISSI) scheduled special meeting of shareholders is expected to be pushed back as shareholders wait for Cypress Semiconductor’s (NASDAQ: CY) next move, two major ISSI shareholders said.
Shareholders are not prepared to vote until Cypress makes its intentions clear, the first shareholder said.
Cypress could launch a tender offer or increase its bid price to USD 21 a share and the transaction would still make strategic sense, the first shareholder said. A second shareholder agreed that the most logical step for Cypress is to go hostile and launch a tender offer.
Both shareholders said they would support a bid with the highest value.
A special meeting of ISSI shareholders is scheduled for Friday, 12 June, to vote on a Chinese consortium’s bid to acquire ISSI for USD 20 a share.
Institutional Shareholder Services (ISS), the proxy service firm, has recommended against the transaction with the consortium, led by Uphill Investment, noting that “because the emergence of another credible bidder with a higher cash offer and potentially less regulatory risk suggests the terms of the Uphill transaction do not maximize value for shareholders,” according to a report issued on 1 June.
The consortium increased the per share offer from its initial USD 19.25, after rival bidder Cypress offered to buy ISSI for USD 19.75 apiece.
Cypress also upped its bid for ISSI in an unsolicited USD 20.25 a share offer, with ISSI responding on 8 June saying that the companies failed to reach a merger agreement because of disagreement on antitrust provisions.
The major disagreement between ISSI and Cypress was on antitrust risks. ISSI asked Cypress to agree to take all necessary actions to ensure receipt of antitrust clearance, but Cypress declined to include such provisions as part of the merger agreement.
The first shareholder is supportive of Cypress not including the so-called “hell or high water agreement”, since such a clause will leave the two companies with no negotiating power in front of antitrust agencies.
He continued that the antitrust risks argued by ISSI are not real, since a major part of the deal involves the specialty DRAM technology, instead of the SRAM technology, where the size and growth has been declining.
In order to address the potential antitrust concerns in the SRAM market, Cypress offered a “side letter” to license ISSI’s SRAM intellectual property for up to three years on a royalty-free basis and to offer related assistance to any replacement suppliers identified by an ISSI SRAM customer or distributor.
ISSI said in a press release yesterday that a combined company would have a total market share of over 80% of the SRAM market in the US, and the two companies are the only full-suite providers of SRAM globally.
The second shareholder is skeptical of the market share numbers cited by ISSI. ISSI is overstating the market, since embedded and discrete SRAM should be distinct end markets, he said. “But it’s a no-brainer that the deal will go through a bumpy antitrust review process,” he added.
In addition, the company serve different end market, and a combined company would not change the competition dynamic, the first shareholder said, adding that Cypress’s SRAM is designed for server communication, whereas ISSI is for the automotive industry.
The first shareholder also consider a combination of Cypress and ISSI would create a larger and secure supplier for customers, than a company controlled by the Chinese consortium.
The second shareholder said that the ISS would not change the recommendation until Cypress release a response regarding its plan going forward.
ISSI and Cypress declined to comment.