So Long, Spreadtrum

By Stephen D. Simpson, CFA | July 12, 2013 AAA

Spreadtrum's (Nasdaq:SPRD) time as a publicly-traded semiconductor company wasn't all that long, and it certainly wasn't always easy, but it looks like it's coming to a happy conclusion for shareholders. Speadtrum announced Friday morning that it had accepted an improved bid from Tsinghua Unigroup and agreed to sell itself for $31 per share in cash.

A Fair Bid...
Not only was Tsinghua's final bid about 10% better than its initial bid, but it represents a takeout price above the company's prior all-time high in late 2011. Spreadtrum is selling itself for about 14 times its trailing EBITDA, only a very slight discount to the mid-teens average of well-known mobile chip companies like Avago (Nasdaq:AVGO), Broadcom (Nasdaq:BRCM), and Qualcomm (Nasdaq:QCOM). Moreover, relative to the company's cash flow growth potential, this was a very reasonable price for the stock.

SEE: What Makes An M&A Deal Work?

All Things Considered
The reason I include the “all things considered” part is that it really isn't fair to compare Spreadtrum straight-up to these other chip companies. Unlike Avago, Broadcom, and Qualcomm (and Intel (Nasdaq:INTC) to an increasing extent), Spreadtrum doesn't try to develop the most cutting-edge chips for the next top-of-the-line smartphones at Apple (Nasdaq:AAPL) and Samsung.

Spreadtrum doesn't even target what most would consider to be the U.S. mass market for smartphones. Instead, Spreadtrum looks to provide chips for companies building low-end smartphones for emerging markets like China. The difference between these markets is substantial – the ASPs for Qualcomm's most advanced chipsets are within spitting distance of the ASP for some entire phones containing Spreadtrum chips.

That creates a very different set of priorities and goals for Spreadtrum. The emphasis here is on efficient, low-cost manufacturing, scale, and a more bare-bones R&D approach that looks to do more with less. But with nearly 60% share of the TD-SCDMA 3G market and relationships with major phone companies like Samsung, Huawei, HTC, and Lenovo (Nasdaq:LNVGY), it's a model that has worked reasonably well for the company.

Not A Market-Shifting Move
It is worth noting that the acquirer of Spreadtrum, Tsinghua Unigroup, is a state-owned LLC. That could have some interesting ramifications for the huge Chinese phone market (and the development of future standards), although it's not as if state-owned companies haven't been competing alongside more conventional private companies for some time already.

Ultimately, I don't think this deal moves the needle very much outside of China. MediaTek and Spreadtrum had an interesting rivalry going on, and Spreadtrum was conceivably a threat to companies like Marvel (Nasdaq:MRVL) on the very low end, but Spreadtrum knew what it was (and what it wasn't), and didn't seem to have delusions of grandeur. There is still a worthwhile question to ask as to whether companies like Spreadtrum and MediaTek can move into the lower ends of the U.S. market (and start pressuring ASPs), but seeing as how a large majority of Chinese phones are still 2G, it seems more like apples and oranges at this point.

The Bottom Line
If anything, this deal for Spreadtrum offers a reminder as to how few semiconductor deals of any size there have been recently. I doubt this will light the fuse on a new wave of consolidation, but it will be interesting to see if companies start turning to deals to improve their scale and/or leverage follow-on markets. In the meantime, expect companies like Broadcom, Qualcomm, and Intel to keep trying to one-up each other in the premium market while a host of Asia-based companies focus on the sizable unit growth opportunities at the lower end of the market.

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