Macroprocessing

Dialog's US chip deal has macroprocessing risks

Dialog Semiconductor's chip-swallowing act needs flawless execution to make it worth the risk. The Frankfurt-listed specialist in power-efficient microchips for smartphones said on September 20 that it was buying Atmel of the United States for $4.6 billion.

Dialog says it expects its leverage to climb to three times net debt to trailing 12-month EBITDA after taking on $2.1 billion in new borrowings. That looks just about manageable given Dialog throws off cash. There are also estimated annual cost savings of $150 million, starting in year two. Using Credit Suisse's conservative estimate of a 20 per cent tax rate for the combined group, those synergies could currently be worth more than $1.2 billion to shareholders, using a rule-of-thumb 10 times multiple.

That is more than the premium paid by Dialog based on the Atmel share price over the last 60 days, though less if compared to a 43 per cent premium based on the close on September 18.

There is strategic rationale as well. Dialog relies on Apple for about three-quarters of its revenue, with just four other customers taking the total to 85 per cent. This deal would dilute the exposure to those five to a less precarious 45 per cent of the combined group's sales. Meanwhile, the pair's businesses have little overlap and Atmel's data-encryption knowhow and Bluetooth technology could enable Dialog to create chips that work better in industrial integrated networks - the so-called "internet of things".

Atmel has higher annual revenue than Dialog and a market capitalisation only a touch below. Yet the analysts' consensus is for Atmel's top line to shrink this year and next. Dialog's revenue is expected to grow at an annual compound rate of 16 per cent over the next three years.

That puts Jalal Bagherli, the Dialog chief executive, in the driving seat. But with Atmel's revenue on a downward trajectory, the task of proving the financial and strategic logic of the deal will be hard. Exane BNP Paribas reckons that if the cost savings fail to materialise, Dialog's 2016 earnings per share will fall by a hefty 37 per cent. Atmel's relative size adds macroprocessing risk to the standard challenge of M&A integration.