As Broadcom Corp. and Conexant Systems Inc. have lost their appetite for acquisitions, Microsemi Corp.,Orange County’s third-largest chip maker,has sounded hungrier in recent months.
The company could make as many as four acquisitions in the next few quarters, according to Chief Executive Jim Peterson.
In fact, as the company looks to push more chips toward telecommunications companies, automakers, handheld computer makers and the defense industry, Microsemi hopes an aggressive acquisition strategy that served it well over the past couple of years will continue to do so in the next.
“We’re looking at a couple of nuisance competitors in the military market,” Peterson said. “And we’re looking at a couple of fiber-optic companies that were a high value in their day, but have come down recently.”
Peterson declined to comment specifically on which companies Microsemi may acquire, citing securities regulations.
More than a year ago, Microsemi set out to acquire its way into faster-growing, higher-profit businesses, buying commercial and defense chip maker LinFinity Microelectronics Inc., of which Peterson was president. Microsemi also bought semiconductor component maker Narda Microwave in 1999 and the business product group of the Infinesse Corp. in March 2000. Infinesse gave Microsemi a key foothold in wireless and networking, both lucrative long-term markets. With the deals, Microsemi sells only products with 60% or greater gross profit margins.
Certainly, Microsemi’s strong stock performance recently bodes well for its ability to make acquisitions. While the company’s stock took a free fall from a high of 48 to a low of 19 in the past two months, it since has recovered many of those losses, rising to a recent close of 36. That stands in contrast to the currency of other OC chip makers, which remain far off their 52-week highs. The company’s market value stood at $500 million as of last week.
Microsemi’s finances also are strong. For its second quarter, Microsemi earned $4.7 million, up from $2.3 million year-to-year, on sales of $63.1 million, up from $57.3 million in the previous second quarter. “Microsemi has benefited from its strong design win activity over the last 18 months, strategic diversification into new markets and integration of some worldwide manufacturing facilities with more focus on overall production efficiencies,” Peterson said.
To augment any acquisitions, Microsemi will be partnering with fiber-optics companies in coming quarters, though Peterson declined to discuss the nature of the plans. The end result of the jockeying, Peterson hopes, will be to position Microsemi for the next market upswing, which he expects to happen shortly after Christmas.
Peterson’s plans mark a more bullish tone from the company, which only a few months ago cautioned that the slowdown that slammed Conexant and Broadcom, OC’s first- and second-largest chip makers, respectively, could also hit Microsemi. But unlike Broadcom and Conexant, which focus on cable modems, digital set-top boxes and networking gear, Microsemi sells chips to a range of businesses,from handheld device makers to aerospace companies,a strategy that has spared it a severe slowdown.
Microsemi chips go to a wide swath of industries. The company gets 29% of its revenue from military and aerospace uses; 20% from handheld devices; 16% from telecommunications; 13% from computer products; 13% from industrial gear; 8% from medical devices; and 2% from automotive equipment.
Microsemi, which recently relocated to Irvine from Santa Ana, has shifted away from its lower-margin businesses, such as computer products to more lucrative businesses, such as telecommunications or automotive businesses. Analysts praise Microsemi for the company’s diverse sales activity. While Broadcom and Conexant have seen their businesses slow down, Microsemi has come through relatively unscathed. Even if Microsemi’s computer products business slows, the company’s sales to defense industries are likely to increase.
In January, Peterson said he expected Microsemi’s business making chips for telecommunications companies to increase to 18% of the company’s revenue this year, compared with 14% last year. Microsemi also expects sales of its chips that go into handheld computers to pick up this year. In its quarterly report issued last week, the company said it expects the shift of revenue from lower-margin products to higher margin products to continue for the rest of the year.
“Based on current backlog and forecasts from customers, we expect third quarter revenues to buck the current trends in the industry, which has announced expected declines of up to 40%,” Peterson said. “Our superior performance over most other semiconductor companies demonstrates that our strategy to address higher-margin application-specific products has been effective.” n
