Dialog-Atmel: microschips, macro price
As consolidation sweeps through the semiconductor industry, it is only natural that executives might suffer from “fear of missing out”. But Elliott Management will not forgive the Fomo they see at UK-based Dialog Semiconductor, which recently agreed to pay $4.6bn for Atmel of the US.
Elliott has launched a campaign to persuade fellow shareholders to block the “value destructive” deal, alleging that Dialog is overpaying in an effort to join the merger party and diversify its customer base. It is currently heavily dependent on Apple.
Shareholders get to vote on November 19 and one complaint is that Dialog, fearful of losing, has changed the rules. Initially, a 75 per cent vote in favour was required; now the threshold is only 50 per cent. Dialog says that the supermajority was an error. Regardless, 50 per cent is a reasonable goal, especially since no executives have large stakes. It is a fair fight.
The new company will be less reliant on Apple but more reliant on debt. Elliott (among others) says that Dialog is taking on too much leverage, at three times combined earnings before interest, tax, depreciation and amortisation. In a crisis, that much debt could become difficult to service. But it is not extreme. Dialog points out that it is similar to the leverage on other recent chip deals. Moody’s did not condemn debt of 3.5 times ebitda for Avago’s $37bn Broadcom purchase. It is also far less debt than in Dell’s purchase of EMC, where Elliott, an investor in the target, cheered.
The price is less easy to defend. Dialog described it as a 42 per cent premium to the undisturbed share price. Elliott, using a different base rate, calculates it at 92 per cent. Yet part of the payment is via new American depositary shares linked to Dialog’s stock, which has declined significantly. From a $10.40 offer at the time of the announcement, it is now worth $9.23. It is cold comfort that the premium looks less toppy if the value destruction has already occurred.