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Microsemi Adds Another in $430M Deal

Irvine-based Microsemi Corp.’s buy of a rival last week was the biggest deal yet for the chipmaker.

Peterson: “Just missed” three deals in three weeks

Microsemi agreed to buy Mountain View’s Actel Corp. for $430 million.

“I think, dollarwise, this is the largest transaction we have done,” Chief Executive Jim Peterson said.

Before Actel, Microsemi’s biggest buy to date was a $245 million acquisition of Israeli chipmaker PowerDsine Ltd. back in 2007.

It’s also the third deal Microsemi’s an-nounced in the past month or so.

“We were trying for three in three weeks, but just missed it,” Peterson joked.

Earlier this month, Microsemi bought Bethesda, Md.-based Arxan Defense Systems Inc. and Atlanta’s VT Silicon Inc.—both small chipmakers—for undisclosed terms.

Arxan makes chips for the military that prevent tampering, piracy and reverse engineering. They’re built into weapons systems along with special software.

VT Silicon designs and makes power amplifier chips for cell phones and other mobile devices that run on the latest wireless networks.

Microsemi makes chips that go into a var- iety of devices, including laptops, satel- lites, weapons, digital televisions and X-ray body scanners.

The Actel deal, which was given the green light by both companies’ boards, is expected to close by the end of the year.

The move is set to “strengthen Microsemi’s position in its four focused markets—security and defense, commercial aerospace and satellite, enterprise and industrial markets,” the company said.

The buy adds to Microsemi’s business making what are called “high reliability” chips, which are built into devices that are costly if they fail.

Actel makes flash-based programmable chips that go into a variety of devices, including anti-tampering technology for the military, medical equipment and other gear.

The deal also is set to give Microsemi a bigger toehold in Europe, where it’s set to get Actel’s satellite business in Russia.

There is roughly an 80% overlap in customers of the two companies, according to Jefferies & Co. analyst Adam Benjamin.

Microsemi agreed to pay 30% more than Actel was worth before the offer.

The deal is set to be funded by a new, seven-year, $375 million loan with the balance being paid in cash by Microsemi.

The company is set to keep Actel’s operation in Silicon Valley, which has some 540 workers. Most of Actel’s managers will stay on to run the unit, according to Peterson.

John East, Actel’s cofounder and chief executive, is set to retire.

Microsemi said it “expects significant synergies from this immediately accretive transaction.”

That’s corporate speak for eking out cost savings from the combined business.

The move is expected to tack on $25 million to $35 million in revenue in the first quarter, according to Patrick Wang, analyst at Wedbush Securities Inc. in San Francisco.

The Actel deal is set to yield an additional $18 million to $23 million in profits by the end of 2011, Microsemi said.

Investors seem to like the big profit boost the deal is set to bring.

Microsemi’s shares are up 12% in the past month on a recent market value of $1.5 billion. They jumped on word of the acquisition in an unusual move for the stock of an acquiring company.

Buying Actel is part of a long-running, two-part strategy Microsemi has to grow sales and profits.

The company does a number of deals each year to keep its promise to investors that roughly 30% to 40% of its yearly revenue comes by way of acquisitions.

Microsemi sees some $500 million in yearly sales.

The other side of the strategy is to boost Microsemi’s technology offerings in order to sell combinations of chips as a complete package.

“This acquisition again is consistent with Microsemi’s corporate strategy to expand beyond being a discrete component supplier to a more systems-approach provider, especially in high reliability, to deliver more sub-system, higher-dollar content solutions,” said Tore Svanberg, an analyst at Stifel, Nicolaus & Co. in Baltimore.

In general, Microsemi gets better profits on chips it sells to government contractors making products for the the military.

“What’s unique here is in high reliability we have such a breadth of product offerings, that we can offer them at very good gross margins, whereas in the consumer market that’s not always achievable,” said Steve Litchfield, executive vice president and chief strategy officer, who heads acquisitions at Microsemi. “We will ultimately be able to realize more dollars per solution.”

On the heels of the Actel deal, Microsemi lifted its sales outlook and reiterated its profit estimates for the September quarter.

The company might be exercising caution in holding its profit outlook due to the costs of the recent acquisitions.

It expects to report profits of $27 million to $29 million on sales of $146 million to $150 million for the quarter.

Wall Street analysts, on average, are expecting Microsemi to report profits of $28 million, up 42% from a year earlier, on sales of $147 million, up roughly 34%.

The company is set to announce results on Nov. 12.

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