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Synopsys to Acquire Magma Design

Zacks Equity Research

Almost two years since their latest acquisition,Synopsys Inc. (NasdaqGS:SNPS - News) has  announced its plans to acquire Magma Design Automation Inc., a chip design software manufacturer. The total transaction is expected to cost $7.35 per share in cash, or a total enterprise value of $507.0 million.

The boards of directors of both the companies have approved the acquisition, and the transaction is currently subject to Magma shareholders’ vote and regulatory approvals. The deal is expected to close by the second quarter of 2012.

The consideration is a 40.0% premium to the stock's 50-day moving average of $5.25 per share, although this is still a discount of 15.6% to the 52-week high of $8.50 reached on July 7.

We believe that the acquisition will be accretive for Synopsys, as Magma’s business operations are similar to that of Synopsys and will facilitate improved performance, area and power while reducing turnaround time and costs on complex ICs. This new collaboration will help chip designers to gain access to the advanced technology required for silicon success at 28 nanometer and below.

Synopsys plans to fund the acquisition through a combination of cash and debt and is expected to announce further details regarding the completion of the deal later. Presently, complexities of semiconductor design are increasingly being solved by advanced designs.

The recent deal marks the company’s first acquisition after a long gap. Back in 2010, the company completed the acquisition of Virage Logic Corp. for $12.0 per share, or a total consideration of approximately $315.0 million.

Virage Logic provides semiconductor intellectual property (NYSE:IP - News) for the design of complex integrated circuits. In a way, this acquisition has supplemented Synopsys' Designware platform, as well as its Intellectual Property product category.

This apart, the company has exhibited good operating performance and sound cost control in the last reported quarter. The acquisition of Magma Design, is expected to boost profitability, but integration risks persist.

The company’s first quarter 2011 guidance is encouraging. Although Synopsys is gaining traction from new products and acquisitions we believe this will take some time to produce favorable results. Besides, the company is also facing competition from Cadence Design Systems (NasdaqGS:CDNS - News).

The company currently has a Zacks #3 Rank (short-term Hold rating).

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