Germany’s Infineon Technologies agreed to buy Silicon-Valley-based Cypress Semiconductor for $10 billion, or $23.85 per share, in an action that will allow Europe’s largest chipmaker to expand further into next-generation autos and internet technologies.
The deal to create the world’s No.8 chipmaker ranks as one of the biggest takeovers led by a European company this year.
Investors quickly gave the deal a negative reaction based on concerns that Infineon was paying a heavy price just as the chip business was weakening, pushing its shares 9% lower on Monday.
The deal would create an automotive leader with a 13% market share, coupling Infineon’s electric drivetrain management with Cypress’s connectivity in areas such as in-car entertainment. This would help the combined company to offer more complete packages for electric vehicles.
Company officials said that Infineon was among the few companies in a sector facing headwinds that could finance a deal that in more prosperous times might have been out of its reach.
Reinhard Ploss, CEO of Infineon, called Monday’s announcement of the planned acquisition of Cypress “a landmark step in Infineon’s strategic development. We will strengthen and accelerate our profitable growth and put our business on a broader basis.”
“This will open up additional growth potential in the automotive, industrial, and internet of things sectors. This transaction also makes our business model even more resilient. We look forward to welcoming our new colleagues from Cypress to Infineon,” Ploss said. “Together, we will continue our shared commitments to innovation and focused R&D investments to accelerate technology advancements.”
The cash offer of $23.85 per share represents a 46% premium to Cypress’ share price over the last month.
Hassane El-Khoury, president and CEO of Cypress said, “The Cypress team is excited to join forces with Infineon to capitalize on the multi-billion dollar opportunities from the massive rise in connectivity and computing requirements of the next technology waves.”
El-Khoury added that the announcement, “is not only a testament to the strength of our team in delivering industry-leading solutions worldwide, but also to what can be realized from uniting our two great companies.”
“Jointly, we will enable more secure, seamless connections, and provide more complete hardware and software sets to strengthen our customers’ products and technologies in their end markets,” he said. “In addition, the strong fit of our two companies will bring enhanced opportunities for our customers and employees.”
The transaction is expected to yield $202 million in cost synergies per annum by 2022 and more than $168 billion in annual revenue synergies in the long-term.
Investors took a less favorable view of the sale, sending shares in Infineon sharply lower on fears that it was overpaying in a transaction that will be 30% financed through equity, with the rest paid for in debt and cash. Cypress shares jumped 27% to $22.74 in U.S. pre-market trading, below Infineon’s offer.
“The overall risk-reward profile of the deal is unfavorable,” Citi analysts said in a note, highlighting execution and regulatory risks, and promised long-term synergies that were hard to substantiate.
One trader speculated that Infineon could itself become a takeover target after the company twice lowered its revenue guidance this year as demand in China slowed and trade frictions escalated between the US. and China.
The closing of this deal is expected by either the end of the calendar year 2019 or by early 2020.