With investors still concerned about Greece, global economic growth and US interest rate rises, markets have started the week on a nervous note.
But chip designer Imagination Technologies is bucking the trend, up 6.8p or 3% to 226p after analysts at Liberum tipped it as a possible bid target.
The company, whose customers include Apple, saw key shareholder Intel sell its stake earlier this year although Apple still has a large stake. As a result Liberum said:
We previously didn’t see Imagination as an acquisition target due to its prior shareholder structure (Intel, Apple key shareholders). However, given Intel’s sell down, the consolidation in the semiconductor sector and Imagination’s material discount to its peer group we believe it could now be a target. We see EDA [electronic design automation] companies such as Synopsys and Cadence, or IP companies such as Rambus as potential acquirers. There would be scope for material cost savings given the customer overlap and ability to close Pure [radio business].
Liberum pointed out there have been a number of deals in the semiconductor sector recently, including Avago/Broadcom, NXP/Freescale, Infineon/IRF, Qualcomm/CSR, Intel/Spreadtrum, and RFMD/Triquint.
Looking at potential bidders in more detail, Liberum said:
EDA companies are increasingly venturing into the IP space. Cadence bought Tensilica in 2013 for an enterprise value of $350m or 8 times EV/Sales to boost its intellectual property offering. Synopsys bought Virage Logic/Arc in 2010 for $289m or 6 times EV/Sales (business was loss making). Synopsys recently signed a deal with Broadcom for its Arc IP. Rambus is also changing its business model as it moves from a litigator to an IP licensor. We note that Rambus has $318m of cash and an acquisition of Imagination would speed up its transition into an IP company.
Apple is still Imagination’s third largest shareholder. We don’t believe Apple would have an issue with Imagination becoming part of any of the three companies above as it would be part of a better resourced company. There is also a chance that Apple itself could decide to bid for Imagination as it is increasing its internal R&D capability and its mobile OS is very tied to Imagination’s graphics IP given its use of the Metal API.
We believe any potential acquirer would only be interested in Imagination’s Technology/IP business and would shut Pure which would lead to a 20% increase in group earnings before interest and tax.
Any potential acquirer would also get access to Imagination’s patent portfolio and could monetize its large investment to date. Over the last 5 years we estimate that Imagination has invested a total of around £750m, which is greater than its current market cap.
Liberum concluded:
Intel and Apple were previously Imagination’s largest and third largest shareholders, respectively. Having industry shareholders made a take-over more complex as both companies were there to ensure Imagination’s independence and to get access to its technology. Now that Intel has sold down its stake we believe a potential acquisition would be easier.
