Chip designer Arm is under pressure after two of its customers decided to combine their businesses.
Anglo-Germany group Dialog Semiconductor agreed to buy US rival Atmel for $4.6bn, it announced on Sunday, and analysts at Liberum - a long term seller of Arm shares - said the news could hit the UK company’s outlook. Liberum said:
Dialog has agreed to acquire US listed Atmel. Both are Arm licensees. There has been a wave of consolidation in the semiconductor space this year, with many of Arm’s leading licensees merging - Qualcomm/CSR, NXP/Freescale, Intel/Altera, Intel/Spreadtrum, Avago/Broadcom, Dialog/Atmel. These mergers could reduce Arm’s licensing opportunity as only one licensee fee will be required from the combined entities going forward.
Licensing is 41% of Arm’s revenue and often overlooked versus royalty. Arm needs a very strong licensing performance in the fourth quarter which could be a risk given this customer consolidation. Consensus expects 2015 processor division licensing to increase by 7% year on year against a very tough comp (fourth quarter 2014 up 30% year on year).
Arm - also a major supplier to Apple - is currently 5.5p lower at 955p in a relatively positive market.
Elsewhere building materials group Wolseley has benefitted from a positive note from analysts at Credit Suisse. It shares are up 84p at £42.20 as the bank issued an outperform rating with a £49 price target, up from £44. It said:
Wolseley has delivered very impressive operational performance in it US division (around 75% of group profit) in recent years in terms of margin expansion and market share growth, and as a result the stock price performance has been noteworthy, with consistent outperformance versus sector and index over the last three years. We believe such outperformance can be maintained, and see a multi-year growth opportunity in the US... Wolseley is added to the Credit Suisse European and Global Focus Lists.
We cite three drivers for our optimism on further US growth: the potential for further branch expansion, the opportunities that come from expanding the share of sales processed online and the tailwinds that come from a growing US construction economy.
