Adesto Technologies (IOTS) – Merger Arbitrage – 14% Upside

Current Price: $10.97

Offer Price: $12.55

Upside: 14%

Expected Closing Date: Q3 2020

Press release

This article was shared by Ilja.

 

This is an all cash cross-border merger within semiconductor industry with the spread having widened significantly (2% >> 14%) over the last two trading days for no apparent reasons.

Dialog Semiconductor (€1.9bn market cap) is acquiring Adesto Technologies (IOTS) for $12.55/share in cash (total consideration about $500m). Conditions include consents from antitrust and CFIUS (foreign investment regulator) as well as Adesto shareholders' approval. Closing is expected in Q3.

Since the announcement (20th of Feb) IOTS used to trade at a very tight (2% spread). The spread started to widen last Friday only. There might be several reasons for that:

  • Apparently, some kind of a prominent financial newsletter has issued an alert to sell Adesto (first comment in this SA article). I was neither able to confirm nor reject this existence of such newsletter.
  • Overall panic and selloff in the stock market.
  • On the 4th of March Dialog reported Q4 results which where in-line with the previous guidance. However, the outlook for 2020 showed continued revenue declines (due to expected run-off in legacy PCIM business, part of which is licencing contract with Apple). Dialog stock declined by 5% the next day after the announcement, but Adesto stock was stable and merger spread only widened by 1%.

Therefore, it seems that the widening of the spread does not really represent any increase in risk of the merger getting closed.

The transaction appears to make economic sense as it brings substantial cross selling opportunities and will also allow Dialog to significantly diversify its customer base. Currently Dialog revenues are very concentrated (83% generated by the 5 largest customers - 2018 annual report), while Adesto has over 5000 customers "the majority of which are new for Dialog". Products of the companies also seem to be fairly complementary (conference call) and will allow not only to create certain new integrated services, but to also enter new markets (automotive, AI).

Dialog is shifting away from 'licensed main PMICs' business, which it started calling 'legacy' with Q4'19 earnings release. It needs to replace the outgoing revenues with new acquired revenues, which it has already been doing for couple of years. IOTS with 50% revenue growth fits in nicely to position Dialog for growth story. Therefore, the risk of Dialog walking away or trying to amend the price due to market sell-off is limited.

Dialog made numerous acquisitions within semi-conductor industry over the last few years. Previously, it has acquired Creative Chips ($100m) and FCI ($45m) in 2019, Silego ($300m) in 2017 and Atmel ($4.6bn) in 2015.

Some further points on the transaction:

  • The price comes at 75% premium pre-announcement price and 14% premium to all time high price of IOTS - juicy premium makes shareholder approval very likely, especially in light of overall sell-off in the markets.
  • Over 12% of shares appear to be in favor of the merger already (here and here).
  • Transaction is not subject to financing. Dialog will finance the transaction from its own cash reserves ($1bn as of Dec'19).
  • Regulatory approvals should not be an issue given small the size of the transaction.

3 COMMENTS

  1. Ilja

    IOTS shareholders have approved the offer on the 5th of May. CFIUS decision will be made in the second half of June’20 and the transaction should close shortly after.

    The company has also released a statement emphasizing a potential adverse effect of COVID on its business and stated that it will be late in reporting Q1 results (will be out by no later that 25th of June).

    Upside to acquisition price stands at 4.5%.

    1. Ilja

      All in all, given the remaining uncertainties and apparent effect from COVID, the idea is closed with 10% profit in 1.5 months.

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