Microchip-Standard Microsystems Merge – Analyst Blog

Microchip Technology Incorporated (MCHP) recently announced the completion of its previously announced acquisition of Standard Microsystems Corporation.

Concurrent with the 1Q13 earnings release last week, Microchip updated the integration process of Standard Microsystems’s operations.

Microchip currently reports in five different product lines — microcontrollers, analog products, memory products, licensing and others — while Standard Microsystem’s product lines include automotive, wireless audio, USB, industrial networking and computing. Following the merger, Microchip will continue run these product lines as Standard Microsystems’s business lines are more end market-based rather than product determined.

Management expects that Microchip’s microcontrollers, analog and memory products will find market in automotive, wireless audio and computing customers with Standard Microsystems’s.

Meanwhile, Standard Microsystems’s mixed signal/analog products cater to a wide array of markets like automotive, PC, industrial and consumer, and management expects that this business will benefit from Microchip’s strategy of expanding in the large horizontal customer base.

Microchip will not create any additional product line for Standard Microsystems’s products. Revenue from Standard Microsystems will be included with Microchip’s microcontroller and analog revenue product line. With the addition of Standard Microsystems’s business, Microchip will extend its reach to two additional vertical markets for Microchip namely – wireless audio and computing.

On the manufacturing front, Standard Microsystems uses many of the same wafer foundries as Microchip for acquiring some of its wafers. Standard Microsystems subcontracts 100% of its assembly and 90% of its test operations. These packages are different from Microchip’s. Hence, Microchip expects that the majority of the assembly and test of the Standard Microsystems products will remain with the subcontractors.

However, some of the manufacturing systems such as wafer ordering, assembly and test management, shipments and warehouses are expected to be combined and management also expects shipment of all Standard Microsystems products from Microchip’s manufacturing systems to start by January 1, 2013 or earlier.

Excluding one-time items, Microchip currently assumes that the acquisition will add approximately 3 cents to the bottom line in the September quarter and 6-7 cents in the December quarter and 7-8 cents in the March quarter next year and 8-9 cents in the June quarter next year.

Last week, the company reported its first quarter of 2013, which missed the Zacks Consensus Estimate by a penny.

We continue to maintain a Neutral recommendation on Microchip. Our Neutral recommendation is supported by a Zacks #3 Rank, which translates into a short-term rating of Hold.