Semiconductor Sector Mergers & Acquisitions Outlook from Stephens Inc. Expert Research Analyst

Wall Street Transcript

67 WALL STREET, New York - October 17, 2012 - The Wall Street Transcript has just published its Semiconductors Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Semiconductor Capital Equipment - Cloud Computing - Mobile Device Consumer Demand - Enterprise Data Storage Demand - High Computing Power Technology - Semiconductor Inventory Burnoff

Companies include: RF Micro Devices Inc. (RFMD), Anadigics, Inc. (ANAD), Semtech Corp. (SMTC), Microsemi Corp. (MSCC), Intersil Corp. (ISIL), QLogic Corp. (QLGC), Emulex Corp. (ELX), Apple Inc. (AAPL), Alcatel-Lucent (ALU), CIENA Corp. (CIEN), OmniVision Technologies Inc. (OVTI), Microchip Technology Inc. (MCHP) and many others.

In the following excerpt from the Semiconductors Report, an expert analyst discusses the M&A outlook for the sector for investors:

TWST: What is your take on valuations for your group? If I'm an investor who is interested in exposure to semiconductors, how attractive an entry point are we at?

Mr. Kumar: We're in a very attractive entry point. We're largely bullish on the sector. Of course, we're picking out areas and companies that have something going for them, such as acquisitions, such as minicycles. Historically, semiconductor stocks trade somewhere between 15 and 16, 17 times forward numbers, and they were, at a point in time, I think, most folks are 12 to 13 for the most part. And so I feel we haven't fully participated in the rally. We are below historical valuations. The fundamentals are getting better. The macro is slowly getting better. And I'm more of the camp that the valuations are very supportive of an upward move, and possibly, a move that's 10%, 15% in the back half.

TWST: What is the outlook for M&A for the sector? What types of deals should investors be keeping an eye out for? And are there some specific transactions brewing right now that you're monitoring?

Mr. Kumar: So there is a tremendous amount of pressure on management to do deals. The reason is that there is very little end market growth, like I mentioned, because of the macro. We're not in a market where we have 8% to 10% semiconductor growth. We're more in a market where we have 3% to 5% semiconductor growth. So you have companies with 30% of their market cap in cash, and they're earning basically, practically, zero interest rate. And so that puts a lot of pressure on these guys to do one or two things - either go buy the stock back to increase earnings and reduce the number of share count, or you better still go buy a company and try to take the fat out - if you will, for a lack of a better term - and try to grow your earnings in that way.

So we've seen a couple of deals here recent. Semtech acquired a company called Gennum out of Canada. Microsemi acquired a company called Zarlink out of Canada, and then, we've seen Microchip, which is very selective in its M&A opportunities, make a pretty substantial acquisition, almost $1 billion of a company called Standard Microsystems that we cover at Morgan Keegan at my previous firm. So we're seeing these deals happen.

And I feel like the areas that we're seeing these deals, these targets have some sort of universal characteristic faith in them. They are poorly run companies with very good technology. So what that means is basically a decent product set with very high level of opex, and you basically get an aggregator or a buyer coming in that keeps the product line, but cuts the fat off, absorbs some of the G&A costs and makes the whole deal work, and that's what we're seeing the most.

TWST: What additional data, insight or information from management teams would be most useful to you in evaluating your semiconductor companies?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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