Microsemi Corp., a maker of chips for the military, aerospace and industrial uses, is tying up loose ends in a fragmented business.
The Irvine-based company has made half a dozen acquisitions in the past two years, spending more than $100 million to acquire companies or product lines.
Microsemi, which has yearly sales of about $450 million, almost exclusively is targeting makers of what are known as high-reliability chips. They go into devices that need to perform under extreme conditions where failures can be costly.
?e are one of the last men standing in the space,?said Rob Adams, vice president of business development who heads Microsemi? acquisition efforts. ?igh-reliability is the heritage of the company. It? a really clear trend for us.?
High-reliability chips are built for durability?hey have to withstand conditions such as outer space or distant ocean depths and continue to function for years.
They?e used in satellites, medical devices and industrial machinery.
Microsemi? picked up the pace of its buying during the recession as it sees more prospects for deals, according to Adams.
?e are undaunted by the economy,?he said. ?e have a strong profitability model, even in this situation.?
Acquisitions
Last month Microsemi bought some assets from publicly traded Spectrum Control Inc. of Pennsylvania for undisclosed terms.
Earlier this year, it paid $28 million for a unit of Endwave Corp. of San Jose. Microsemi got Endwave? defense electronics and security business, which makes chips that run radar fences, sensors and other homeland security devices.
Other deals include Microsemi? $20 million October buy of La Mirada-based Babcock Inc., a maker of power controllers and sensors for the military, and its $25 million buy of local rival Costa Mesa? Semicoa Semiconductors Inc. for $25 million in July.
The Semicoa deal touched on a hot-button issue that? being looked at anew by the Obama administration.
In December, the Justice Department filed an antitrust suit against Microsemi claiming that the deal creates a monopoly on certain types of chips that amplify electrical signals.
The government said it? seeking to undo the deal and sell off the assets that Microsemi bought from Semicoa, which included millions of dollars of equipment.
Microsemi? Adams said the government? case against Microsemi is slow-going and still is in the evidence-gathering phase.
For now, Microsemi plans to fight the case.
?t the end of the day, we have the obligation to return value to shareholders, not spend money on lawyers,?Adams said. ?e are going to see how it goes and do the rational thing for our investors.?
Analysts, for the most part, don? see the complaint as much of a threat.
? would say it? not as much of an overhang as before,?said Patrick Wang, an analyst at Wedbush Morgan Securities in New York. ?he risk still exists, but it? less likely to turn into something material now.?
Wall Street has a hot and cold view of high-reliability chipmakers. As of last week, Microsemi had a market value of $1 billion, which is down about 55% in the past 12 months.
Steady Business
While Microsemi? shares have sunk along with those of other chipmakers, its results tend to hold up better during downturns.
Microsemi sees a steady stream of revenue and comfortable profits from the government, military and other big players in the aerospace and medical industries.
But during better times, high-reliability chipmakers take a back seat to more fast-growing companies, such as Irvine? Broadcom Corp., which surges with demand for computers and consumer electronics.
High-reliability chips are ? more mature market with a growth rate that? at a steady chug,?Microsemi? Adams said.
Still, analysts like that high-reliability chips are a business that? tough to get into. High-reliability chips require months of testing to see if they can withstand extreme heat, cold and vibration.
?he barriers to entry are quite significant,?Wang said.
Most industry watchers agree Micro-semi? rolling up of high-reliability chipmakers is a good strategy.
?hey are being very opportunistic and picking up companies that have a bit of market share with their foot in the door at some big customers,?Wang said. ? lot of these companies have been around for a while and have a niche product and a specific set of customers who they have been selling to for years.?
Microsemi has a track record of integrating small acquisitions so they add to earnings right away.
Chief Executive ?im Peterson has done a phenomenal job squeezing out the fat and keeping the core parts of these business profitable,?Wang said.
More Targets
Microsemi still has its pick of small high-reliability chipmakers to scoop up.
A lot of them are buried within the operations of larger companies and aren? performing at full potential.
It can offer such businesses a pretty good setup, often keeping managers around. It also helps them maximize sales through a big network of customers, distributors and resellers.
?icrosemi controls more of the market for some of these discrete chips, they have better pricing power and they are able to be a long-term partner,?said Craig Berger, an analyst at FBR Capital Markets & Co. in New York.
Microsemi has come calling as some founders of these small chipmakers look for an exit.
? lot of these businesses are small, mom-and-pop shops,?Adams said. ?emographics are really in our favor because most of the principals are in their 70s and want an exit so they can retire.?
The company currently has three deals in the pipeline, according to Adams.
