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Uneasy Dialog

17 November 2015 By Dominic Elliott

Shareholders in chipmaker Dialog Semiconductor should short-circuit its bid for peer Atmel.

Activist fund Elliott Management has urged the Anglo-German chipmaker’s investors to vote against the $4 billion-plus deal on Nov. 19. There’s logic in Dialog trying to diversify away from its dependence on Apple for 80 percent of revenue. But the takeover is facing more obstacles than the average.

Dialog already saw off a competing bid for Atmel, which makes internet-enabled microcontrollers for industrial and consumer devices. It has found it harder to rebut a critique of the deal’s potential return on investment from proxy adviser ISS, while also fending off Elliott’s claim that it is value destructive and dangerously leveraged. Worse, Dialog haplessly released third-quarter numbers two days early on Oct. 26: its stock fell a fifth and has failed to fully recover.

That effectively lowers the bid price, since just over half of the consideration is in Dialog shares. The offer is now worth $8.86 per Atmel share based on Dialog’s closing price on Nov. 17, down from $10.42 when it was announced, helped too by a stronger euro.

Elliott still thinks Atmel is massively overvalued, but its case is inconsistent. While Elliott has 5 percent of Dialog’s voting rights, it has yet to confirm that it actually holds shares directly. And despite arguing that the bid for Atmel would leave Dialog too reliant on debt, one of its alternative suggestions is for the company to take on more borrowings in order to buy back shares.

Yet Dialog has also failed to convince. The company thinks the deal should be measured against a hurdle rate of just 6 percent. But that is artificially low. Atmel will be loaded up with debt at first, lowering its weighted average cost of capital, but Dialog says that it wants to be able to mostly pay the debt down within three years.

Regardless of these incongruities, there’s a good reason to doubt the deal: mashing these two companies together looks really complex.

Yes, Dialog has hired consultant Bain to help. But its mooted cost synergies of $150 million suggest it plans to cut over a quarter of Atmel’s operating expenses, or worse, eat into its research and development budget. And the U.S. bid target has 5,100 employees to Dialog’s 1,500. That sounds like a management nightmare. Dialog’s investors should probably conclude that it just won’t gel with Atmel.


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