Investors Excited about New Development in the Semiconductor M&A Space

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Things around the $2 billion semiconductor company PMC-Sierra Inc (NASDAQ:PMCS) are heating up less than two weeks after Skyworks Solutions Inc (NASDAQ:SWKS) agreed to acquire it for $10.50 per share (see article), as another semiconductor company stepped up with a higher bid earlier today. Microsemi Corporation (NASDAQ:MSCC) offered to pay $11.50 per each share of PMC-Sierra, with $8.75 per share to be in cash and the rest in stock. As a result, the stock of PMC-Sierra surged by over 14%, after having jumped by over 33% earlier on the back of the Skyworks Solutions bid.

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This development will most likely make investors even more excited. As we noted earlier, out of over 700 funds from our database, 27 funds held stakes in PMC-Sierra Inc (NASDAQ:PMCS) equal to almost 40% of the company’s outstanding stock at the end of June. They were less fond of Microsemi, with 21 investors reporting positions equal to 3.80% of its float. Today Microsemi Corporation (NASDAQ:MSCC)’s stock is over 5% in the red, which could signal that investors think the company is offering too much for PMC-Sierra. 

Why do we look at the hedge fund sentiment towards stocks? The reason is simple, we believe that hedge funds’ skills and expertise can be used to identify some of the most profitable stocks in the market. Even though hedge funds as an industry have been underperforming the market for the last several years, we have analyzed their equity portfolios and discovered that they generated solid returns from their long positions individually. For example, the 15 most popular small-cap stocks among hedge funds from our database returned 102% in the last three years, beating the S&P 500 ETF (SPY) by some 53 percentage points (see more details here).

So, as we can see, hedge funds have not been so thrilled about Microsemi, but maybe the acquisition of PMC-Sierra will change their sentiment for the better. The company believes the acquisition of PMC-Sierra Inc (NASDAQ:PMCS) will result in a number of cost savings and other synergies and that the combined company will have revenue and EBITDA north of $1.7 billion and $600 million respectively.

Moreover, Microsemi Corporation (NASDAQ:MSCC) is willing to move quickly with the acquisition if the board and shareholders of PMC-Sierra approve the deal. It has secured $2.925 billion in debt commitment from Morgan Stanley Senior Funding, which includes refinancing of outstanding debt. The company intends to close the deal by the end of the current year and does not require approvals from foreign government entities, as compared to the first half of 2016 deadline announced by Skyworks Solutions Inc (NASDAQ:SWKS), which would require regulatory approval from China. However, under the current terms of the merger agreement between PMC and Skyworks, the former will have to pay $70 million if it approves a superior bid.

Among the top shareholders of PMC-Sierra Inc (NASDAQ:PMCS) are Eric Bannasch’s Cadian Capital, Relational Investors, and Ken Fisher’s Fisher Asset Management, which own stakes of 29.68 million shares, 17.31 million shares, and 11.66 million shares respectively. In addition, Soros Fund Management more than doubled its position to 6.07 million shares in the June quarter. Soros is also a shareholder of Microsemi Corporation (NASDAQ:MSCC), owning 281,066 shares as of the end of June.

On the following pages, you can find the presentation issued by Microsemi Corporation (NASDAQ:MSCC) regarding its proposal to acquire PMC-Sierra.

Disclosure: None

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