Microchip Technology Incorporated (MCHP) recently updated its integration activities with Standard Microsystems. Microchip Technology signed a definitive agreement in May 2012 to acquire Standard Microsystems Corporation for $37.00 per share in cash for about $939 million. The net value stood at $766 million, excluding Standard Microsystems cash and investments on its balance sheet of approximately $173 million.
The merger was approved in July 2012. Concurrent with the second quarter 2013 earnings release last week, Microchip updated the integration process of Standard Microsystems's operations.
Microchip remains on track to ship products of Standard Microsystems from its operational system by January 1, 2013 and converge all business tracks by the first quarter of calendar year 2013.
Microchip intends to exploit the assembly and test infrastructure in Thailand to obtain synergies. The company has combined its supply chains and hence has identified a number of opportunities to improve its cost structure.
Microchip has already identified a number of synergy opportunities in the area of IP acquisition and development, CAD infrastructure, reference design, joint marketing and joint development.
Meanwhile, Microchip continues to maintain its focus on the different product lines to ensure customer focus and continuity as the sales teams work together to cross-train and identify cross-selling opportunities as the integration progresses further.
Microchip has combined the distribution networks of the two companies and franchised Arrow Electronics (ARW), which was distributing Standard Microsystems products, to sell Microchip products as well and franchised Future Electronics, which was the distributor for Microchip products, to sell Standard Microsystems products.
Consequently, all the three global distributors, Avnet Inc (AVT), Arrow and Future Electronics, are now distributing Microchip's complete product line globally.
Standard Microsystems is expected to contribute approximately $87 million to $94 million to the top line in the December quarter. However, the business is expected to be weak due to the global macroeconomic uncertainty.
Excluding one-time items, Microchip currently assumes that the acquisition will add approximately 4-5 cents in the December quarter, down from the earlier projection of 6-7 cents due to the soft business conditions. The acquisition will add 5- 6 cents in the March quarter next year and 6-7 cents in the June quarter next year, down by a penny from the earlier projection.
Microchip is also undertaking actions to improve the gross margin of the combines business portfolio, lower operating expenses and substantially increase its operating profit.
Last week, the company reported its second quarter of 2013, which missed the Zacks Consensus Estimate by 5 cents.
We believe the integration process will be a difficult affair and the company might not be able to achieve the targeted synergies. We continue to maintain a Neutral recommendation on Microchip. However, the near-term weakness enforces us to have a Zacks #5 Rank on Microchip, which translates into a short-term rating of Strong Sell.