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   Technology StocksSilicon Motion Inc. (SIMO)


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From: Elroy5/24/2022 2:46:27 PM
3 Recommendations   of 2619
 
MXL did a presentation at JP Morgan today. There is a webcast on their web site.

Here are some comments that relate to SIMO.

Q: Why will acquiring SIMO benefit MXL? A: We expect to realize synergies of scale both in wafer volumes and IP side. It will be more than 25% accretive (which includes $100m of synergy - 30% from COGS and 70% from Op Ex).

Q: What about the leverage caused by the new debt? A: When announced the new debt will bring MXL to a 4.5x debt to EBITDA ratio, at close (due to growth of EBITDA presumably) it will be 4.0x, and 18 months post-close it will be 3.0x.

Q: What regulatory challenges do you expect? A: We have to go through standard regulatory approvals - HSR, SAMR, China will likely take the longest. They expect the decision in the first half of next year, it could be sooner. Both companies are relatively small, and there is no overlap in product focus.

-----

Then they discussed the core MXL business which has nothing to do with SIMO.

Someone asked a Question about why the reaction to the SIMO deal is so negative (MXL's share price declined so much)? He said that MXL's business is doing really well despite the recent stock market decline. They wouldn't do a big deal if they weren't confident in their own business. As for SIMO they've only given accretion guidance, and based on estimates that are out their published by others, MXL's guidance is modest, and MXL has tried to be conservative on gross margins. MXL intends to move combined entity gross margins higher.

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From: Elroy5/25/2022 10:50:44 AM
   of 2619
 
Embedded Computing Design’s Automotive Technologies: Silicon Motion Showcased Automotive Storage Solutions

storagenewsletter.com

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From: Elroy5/30/2022 2:06:26 PM
1 Recommendation   of 2619
 
Well, OK there's not much to investing in SIMO now other than waiting for the acquisition by MXL to close.

My calculation says SIMO has 20% upside to the value of the cash (about $93) plus stock (0.388 shares of MXL per share of SIMO). It's a great stock to be invested if the market continues it's decline, and if the tech market turns up, SIMO owners will get both the 20% price increase as the gap closes, and ~39% of the increase in MXL stock which may occur between now and deal close.

MXL seems to have a very strong backlog and demand trends, so as they report their quarterly results perhaps the mood around MXL will turn more positive. MXL is now $40, it might be able to get to $80 if it reports well between now and next March, so SIMO would enjoy $16 of price appreciation (in addition to closing the 20% gap) if MXL makes it to $80.

Also, as SIMO reports Q2 and Q3 we've still got a chance that another buyer appears, and outbids MXL, but that seems a far off hope at this time. Lets see what SIMO reports for Q2 and Q3, if it's as strong as seems possible, perhaps that will drive other related companies (MediaTek? MCHP?) to want to own SIMO's revenues and cash flows. Remember SIMO said they would grow 20%-30% in 2022, and more than that if they could get a higher allocation from TSMC. There has been so much news of slowdown in PCs and cell phones that one would think SIMO can get a higher allocation from TSMC, the question then becomes has SIMO's demand stayed elevated such that SIMO can take and sell that higher allocation, or has SIMO also experienced some cancellations which change their outlook? Since SIMO isn't giving guidance due to the deal announcement, we've gotta wait and see what they actually report rather than hear management's outlook (like normal).

I also wonder whether SIMO will continue to pay it's dividend until the deal closes? I'm sure MXL would rather have that cash to pay down the debt they plan to take on, but whether SIMO management pays the dividend or cancels it going forward due to the deal remains unknown.

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To: Elroy who wrote (2552)5/31/2022 1:37:06 PM
From: Maurice H. Norcott
   of 2619
 
I also wonder whether SIMO will continue to pay it's dividend until the deal closes? I'm sure MXL would rather have that cash to pay down the debt they plan to take on, but whether SIMO management pays the dividend or cancels it going forward due to the deal remains unknown.

That might trigger selling from institutional funds that are passively managed and only hold
dividend stocks ?

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To: Maurice H. Norcott who wrote (2553)5/31/2022 4:50:34 PM
From: Sam
1 Recommendation   of 2619
 
But SIMO can't run the company for MXL until the takeover actually happens. In the meantime, they should run it for their stockholders. So the dividend should be paid.

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To: Sam who wrote (2554)5/31/2022 7:54:12 PM
From: Elroy
   of 2619
 
But SIMO can't run the company for MXL until the takeover actually happens. In the meantime, they should run it for their stockholders. So the dividend should be paid.

SIMO didn't update next quarter of 2022 guidance when the deal was announced (and then they reported). SIMO also didn't hold their standard conference call and answer questions.

So ..... if you ask me they are running the company now to close the deal, and not solely for the benefit of shareholders. I've heard that it's standard practice in situations like this (you are being acquired) to stop investor communications, and also stop paying dividends. We shall see.

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From: Elroy6/7/2022 10:00:55 PM
1 Recommendation   of 2619
 
there was a MXL presentation at a Stifel conference today:

wsw.com

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From: Elroy6/8/2022 5:07:25 PM
   of 2619
 
Another MXL conference presentation. The MXL CEO gives a decent explanation of MXL, and some reasons for the acquisition.

siliconmotiontechnologycorporation.gcs-web.com

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From: Elroy6/17/2022 7:31:41 PM
   of 2619
 
SIMO share price is down to $84 despite indications that MXL will buy SIMO for $95.50 cash + 0.388 MXL shares per SIMO share.

My hunch is the increase in interest rates perhaps makes the deal less likely to go through? MXL was going to borrow about $3 billion to do the cash portion of the deal. Maybe they will have to pay quite a lot higher interest rate on that loan than anticipated.

Interesting.

If MXL walks away from the deal they need to pay SIMO $160m break up fee. That's not too shabby.

There are still at least 8 months before the deal closes, and I guess rates could go anywhere in the meantime, but it seems like interest rates are going up, and I imagine at some point there is an interest rate that makes this deal unattractive to MXL......maybe, hard to say! The cash generation of the two companies probably won't be affected much by increased interest rates, so even if the interest rate on the loan is higher than expected MXL's ability to pay down the loan should be similar.

Interesting interesting. My guess is the deal goes through, but the market seems to be having increased concerns that it may not.

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From: franklin16/23/2022 12:49:01 PM
   of 2619
 
From Seeking Apha

Silicon Motion And MaxLinear: Deal Not Done As Hurdles Remain In The Way

Jun. 16, 2022 8:59 AM ET Silicon Motion Technology Corporation (SIMO) MXL 4 Comments6 Likes

SummarySIMO grew sales and profits by double digits in Q1, but that was not the reason why the stock has soared higher, outperforming most.MXL intends to acquire SIMO, but longs should expect difficulties in getting the deal through for a couple of reasons.If the deal does not go through, the stock is likely to get punished due to current market conditions, especially with end-use demand going down.The deal may or may not go through as proposed, but it is still worth holding on to SIMO, provided one can stomach short-term setbacks.

It's been over a month since Silicon Motion Technology Corporation (NASDAQ: SIMO) jumped 17% in one day. The big gain coincided with the release of the Q1 earnings report, but that was not the reason for the move. The quarterly report got overshadowed by news that SIMO and MaxLinear ( MXL) agreed to merge the two together. However, it will take some time and effort for the deal to be completed, assuming of course it gets that far as the deal will need to overcome a couple of hurdles. Why will be covered next.

MXL wants SIMOBulls got a pleasant surprise when word got out that MXL is looking to acquire SIMO in a cash and stock transaction valued at $3.8B or $114.34 per ADS. Shareholders of SIMO can expect to get 0.388 share of MXL stock for each ADS, plus $93.54 in cash. MXL hopes to close the transaction in the first half of 2023.

The deal would bring together two companies that are focused on different markets, yet similar in size. The table below lists some of the multiples for SIMO and MXL. In general, SIMO trades at lower valuations than MXL. On the other hand, one could argue that is justified with MXL's greater reliance on the enterprise, unlike SIMO which is more exposed to the more fickle consumer side of things.

SIMO

MXL

Market cap

$3.14B

$3.02B

Enterprise value

$2.91B

$3.17B

Revenue ("ttm")

$981.7M

$947.0M

EBITDA

$284.5M

$189.5M

Trailing P/E

14.08

40.22

Forward P/E

11.62

17.73

PEG ratio

0.09

-

P/S

3.14

2.93

P/B

4.86

5.30

EV/sales

2.96

3.25

Trailing EV/EBITDA

10.22

16.74

Forward EV/EBITDA

8.41

7.86


Source: Seeking Alpha

Why SIMO may be under pressure to complete a dealSome may have been surprised by SIMO's decision to sell the company. After all, SIMO has done very well recently in terms of sales and profit growth. However, there are signs of a market slowdown, if not an outright downturn, may be on the horizon. SIMO is basically a supplier of NAND flash memory controllers for solid-state storage devices. As such, SIMO is heavily exposed to the smartphone and PC markets, both of which are currently faced with falling demand.

There are some indications this reduction in end-market demand has made its way back to SIMO. Quarterly revenue had increased sequentially for five consecutive quarters, but this came to an end in Q1 FY2022. Q1 revenue increased by 32.7% YoY to $242M, but it also represented a decline of 8.4% QoQ. GAAP EPADS increased by 63.3% YoY to $1.60 and non-GAAP EPADS increased by 55% YoY to $1.72, both less than in the preceding quarter. The table below shows the numbers for Q1 FY2022.

(GAAP)

Q1 FY2022

Q4 FY2021

Q1 FY2021

QoQ

YoY

Revenue

$241.978M

$264.357M

$182.399M

(8.47%)

32.66%

Gross margin

52.1%

49.6%

50.0%

250bps

210bps

Operating margin

27.4%

27.3%

24.3%

10bps

310bps

Operating income

$66.362M

$72.148M

$44.392M

(8.02%)

49.49%

Net income

$54.502M

$60.635M

$34.400M

(10.11%)

58.44%

EPADS

$1.60

$1.73

$0.98

(7.51%)

63.27%

(Non-GAAP)

Revenue

$241.978M

$264.357M

$182.399M

(8.47%)

32.66%

Gross margin

52.2%

49.9%

50.7%

230bps

150bps

Operating margin

29.8%

30.9%

26.6%

(110bps)

320bps

Operating income

$72.032M

$81.620M

$48.538M

(11.75%)

48.40%

Net income

$58.945M

$67.592M

$38.659M

(12.79%)

52.47%

EPADS

$1.72

$1.91

$1.11

(9.95%)

54.95%


Source: SIMO Form 6-K

It may be too early to tell, but it would not be the first time for SIMO to be faced with a downturn after an upturn. The flash memory market tends to go through these cycles, which makes it difficult for SIMO to escape the fallout associated with market turns. SIMO may be wise to close a deal while the going is still good. If the market goes down, quarterly numbers could get a lot worse. SIMO would not receive the same valuation that it does now.

Wall Street may not be totally sold on SIMO and MXLThe chart below shows how SIMO shareholders have gained from the proposed transaction. SIMO has suffered in 2022 along with other semis, but the offer from MXL helped erase most of the YTD losses. SIMO is still down 6% YTD, but that is better than the semiconductor sector as a whole. For instance, the iShares PHLX Semiconductor ETF is down 32% YTD.

Source: finviz.com

On the other hand, MXL has not fared as well. MXL continues to fall, which means the MXL shares SIMO shareholders are supposed to get are losing value. MXL has lost 52% of its value YTD. The price action suggests the proposed transaction is getting the thumbs down from the market. Note also how SIMO is trading below the proposed acquisition price, a sign there are doubts about the deal as proposed.

Source: finviz.com

Why there is reason to doubt the deal will go through as proposedThere is reason to be skeptical. There are a number of hurdles to overcome before the deal can be finalized. For instance, shareholders need to give approval. Some may be reluctant because the offer may not be enticing enough in their eyes. The cash component, for instance, only brought the stock price back to where it was in late 2021 before the deal. There's also the MXL share component, but that one continues to lose value as the stock goes down. One could argue the offer is merely okay, but nothing that blows people away. Shareholder approval is not a given.

More importantly, the deal needs to pass regulatory approval. While SIMO is the market leader in NAND controllers, there are lots of competing suppliers. Most regulators will therefore be less inclined to oppose the deal. Nevertheless, regulatory approval could be difficult to come by in the case of China. Keep in mind that China and the U.S. are in a struggle in the semiconductor market with both trying to increase their share of the market.

The U.S. government has used its position to deny the supply of certain semiconductors to a number of Chinese companies. China has in turn tried to develop its own semiconductor companies, but it still needs access to outside suppliers. Acquisitions are one way to boost domestic suppliers, but many acquisitions in the semiconductor space have come under increased scrutiny.

For instance, the U.S. government has blocked a number of acquisition attempts by China-based entities. Examples include Micron ( MU), Lattice Semiconductor ( LSCC) and, more recently, Magnachip ( MX). From China's perspective, this could be seen as a policy to restrain the development of its own semiconductor industry. Geopolitical considerations have come into play.

In response, China could adopt a policy of limiting U.S. influence by blocking certain acquisitions by U.S. companies, if it hasn't already. While each case differs, China seems to be more willing to approve acquisitions that only involve U.S. semiconductor companies than acquisitions involving a U.S. company and a non-U.S. one. AMD's ( AMD) acquisition of Xilinx is an example of the former and Nvidia's ( NVDA) aborted attempt to acquire ARM is an example of the latter. China approved of the first, but not the second because the latter would increase U.S. standing.

There is an incentive on the part of China to make sure that non-U.S. companies do not come under the control of the U.S. as that would effectively cut them off from China, if the U.S. government chooses to do so. If this is correct, then MXL's intention to acquire SIMO may be dead on arrival as it involves a U.S. company trying to acquire a Taiwanese company, the latter having fairly extensive dealings with China.

Investor takeawaysThe proposal to combine MXL and SIMO has gotten a mixed reaction. On the one hand, a merger makes sense as the two would complement each other. There are several arguments as why a deal could be a good thing. Shareholders would get a significant premium and it would remove the risk of the stock losing value if the market goes south.

On the other hand, the odds of the deal going through as proposed is probably 50/50 and one could argue it is worse than that. There is reason to doubt the deal is a sure thing. There are substantial hurdles to overcome if the deal is to pass muster. While it is by no means the only obstacle in the way, regulatory approval from China may be the hardest to come by.

The reality is that China has encountered great difficulties due to the sway the U.S. government has over much of the semiconductor industry. It's hard to see how letting one more semiconductor company come under the control of the U.S. is in China's best interest. China not giving approval is more likely than not with this in mind.

A previous article from March ended with the conclusion that SIMO was a buy at $70 or so, even though the stock was trending lower. That turned out to be a good move with the stock having gone on a rally, in part due to the offer from MXL valuing SIMO at over $114 per ADS. However, while I remain bullish on SIMO, I would refrain from being a buyer at the moment.

In fact, some may want to lock in profits by taking some chips off the table as there is a high probability the stock loses ground if or when the proposed transaction by MXL encounters pushback, whether from China or some other corner. The fall could be amplified by current market conditions with the stock market struggling and if the quarterly numbers from SIMO get worse due to declining end-use demand.

At the same time, it is worth holding onto SIMO. There is still an outside chance of another offer from another party. Not only would there be a higher price, which may please those who feel the current offer is not good enough, but China is more likely to approve a deal if it is done by a non-U.S. company, removing a key reason to raise objections.

In addition, SIMO still has good prospects in the long run. The NAND market is growing and it is expected to keep growing in the coming years. For instance, the market for SSD controllers is predicted to expand from $14B to $53B in 2020-2030, which represents a CAGR of 14.4%. SIMO is a good way to ride this market higher as it holds technological leadership in the market.

Bottom line, longs should be prepared for a bumpy road ahead. Lots of things can still happen. The proposed acquisition is not a done deal and it could very well fail, which would almost certainly cause the stock to drop, especially under current conditions. Still, SIMO is worth holding whether the deal with MXL goes through or, more likely, does not.

This article was written by




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