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RFMD + TriQuint = ?

What will be the result of the merger of these US heavyweights?




RICHARD STEVENSON INVESTIGATES

If you marry your childhood sweetheart in your late teens, you’ll easily adapt to their ways, but you may struggle to make ends meet. Meanwhile, if you refrain from tying the knot until you have established your career, money worries may disappear, but by then you might have become a creature of habit, so it is best to set up a home with a partner who complements you.

It’s a similar state of affairs when companies join together. Start-ups may have little cash to offer the new venture, but they are flexible and dynamic. Established firms, on the other hand, can contribute much more in terms of cash, equipment and sales channels, but they have far more inertia, and changes take time. So, when established firms get together, how well they fit plays a big part in how successful they are.

Right now, a massive merger is being planned between US giants TriQuint and RFMD, two firms that are considered by many to be complementary.

“RFMD is much stronger in handsets, TriQuint is much stronger on the defence side, and although there are obvious overlaps, the strengths of the two companies seem to match up pretty well," says Eric Higham, Director for the GaAs & Compound Semiconductor Technologies Service at Strategy Analytics.

Voicing similar views is James Klein, currently Vice President of Infrastructure and Defence Products at TriQuint. Klein, who in the new outfit will be the President of Infrastructure and Defence, believes that customers are excited about this merger: “We will bring into play a broader portfolio and a broader set of technologies, especially in the infrastructure business."

The still-to-be-named venture should generate about 75 percent of its revenue from the sale of products to handset manufacturers. In this sector, which is migrating towards integrated modules, the new company has all the key building blocks, including GaAs broadband amplifiers, high-volume CMOS PAs, antenna switches and a range of filters. Using this extensive portfolio to launch new products should not prove that taxing, as RFMD is already using TriQuint’s filters in some of its products.

In the defence, aerospace and infrastructure division, Klein points out that there is little overlap between the two companies’ products. “TriQuint has been more in the defence space and optical, and RFMD has focused on some other spaces, like WiFi and wireless LAN."

Soaring valuations for both companies highlight the investor backing behind the joining together of the two chipmakers. After announcing the merger on

24 February, TriQuint’s closing share price for jumped from $9.23 to $11.64 and has since risen to more than $13 – and RFMD’s shares have climbed from $5.81 to $7.03 and then on to just above $8 over the same timeframe.

Within two years of completing the merger, the board of the new company – which will be made up of five directors from both companies, and led by RFMD’s CEO Bob Bruggeworth – should have overseen savings of at least $150 million in cost synergies that will enable operation at a gross margin of 45 percent and an operating margin of 25 percent. Part of the cost cutting will result from redundancies, and some analysts are suggesting that TriQuint’s GaAs fab in Oregon that produces many of the company’s PAs will go.

Sum together the revenues of RFMD and TriQuint and it suggests that the new company should deliver annual sales of $2.067 billion. But that’s a very simplistic calculation. Handset manufacturers tend to deal with two suppliers for their products to reduce supply chain risks, and if RFMD and TriQuint have those contracts, a new second source may be enlisted that will put a dent in the revenue of the new outfit. However, Higham thinks that this drawback might be outweighed by additional sales, which are the result of handset makers wanting to work with a very big company that operates at superior economies of scale.

Business model

The handset side of TriQuint’s business has recently come in for criticism from one of its key investors, Starboard Value, which owns about 8 percent of the firm’s shares.  This investor wrote to TriQuint on 29 October, 2013, arguing that more than 100 percent of the company’s profits were coming from the networks & defence and bulk acoustic wave filter businesses; but the strong performance of these divisions was overshadowed by the mobile PA business, which suffered from significant utilization issues and missed design cycles. In this letter, which can be viewed on the SEC web site, Starboard also claimed that the PA business operated at gross margins below 10 percent over the last 12 months.

In this correspondence from Starboard, these investors blamed losses on an inefficient manufacturing model, while praising the fab-lite approach taken by Skyworks and Avago. About those two firms, Starboard wrote: Both companies manufacture only a portion of their products internally, while relying on foundries to produce some of their products and for ‘swing capacity’ when volumes increase significantly.

Higham, who has read the letter from Starboard, broadly agrees with the analysis of the relative profitability of the various divisions within TriQuint. However, he is not convinced by the argument that a fab-lite structure is a pre-requisite for good margins. In his view, the recent success of Skyworks, relative to RFMD, is not simply due to differences in the approach taken to chip manufacture – it also depends on customer relationships.

To explain his view, Higham considers the recent history in the PA market. He points out that that it was not that long ago that RFMD was the number one in the handset market, due to its close relationship with Nokia, the leading handset manufacturer of the time. “Since RFMD had such a tight tie-in with Nokia in their heyday, it forced other companies, primarily Skyworks, to find other technologies, make other products and find other customers." These efforts ultimately paid dividends when Skyworks found a winning formula in the smartphone market, and the likes of Samsung and LG launched popular products.

Higham blames the troubled times at Nokia for the downward path taken by RFMD, which should soon stop its slide. “It seems that RFMD have bottomed out, and they are now heading back up again with revenue and profitability."

Thanks to the merger, Higham thinks that the new outfit’s handset business can do even better. “TriQuint brings filter technology to the party, and I would think that should provide a good leg-up for the combined company. RFMD is pushing pretty heavily on the front-end module approach, and being able to have filters in there – and to have them home-grown – will be an attractive feature."

To operate the handset division at healthy margins, the new company will need to cut costs. “There is some overlap, and they will [have to] figure out what to do with that," warns Higham. He points out that this decision must be made against the backdrop of a move to multi-band, multi-mode PAs, which could have a bigger short-term impact on the GaAs business than the emergence of CMOS PAs. “It is GaAs design cannibalizing itself. That multi-band, multi-mode PA will consume less area than the devices it replaces, and it will also have less bill-of-material costs than the device it replaces." So the management taking charge may not only need to address the excess capacity of the combined outfit, but make further trimmings due to moves to more sophisticated PAs.

Additional challenges for this board will be to manage the transformation in a way that optimises the existing talent, while maintaining a focus on customers. What will help the leaders of both companies is that they have been involved in acquisitions before: RFMD acquired Sirenza in 2007 and Filtronic in 2008, while TriQuint acquired CAP Wireless in 2013 and WJ Communications in 2008.

To ensure that the merger goes well, the leadership will need to strike a fine balance between moving too quickly and failing to get the right people in the right positions, and taking so long that it has a negative impact on the staff.  “Potentially, it’s a very unproductive time," says Higham. “Engineers don’t deal well with uncertainty. If you say to yourself: ‘What is the future going to hold?’, you might start looking around." And if the most talented decide to leave, they will find it easiest to get a new job, and their exit will create the biggest holes to fill.



Shares in TriQuint and RFMD have soared since the merger of the two companies was announced on 24 February, 2014

Further consolidation?

An additional impact of the merger is that it could trigger further consolidation: Many have already been asking Higham if that is likely to happen.

On the handset side, he feels this is unlikely: “Skyworks are happy with their business model. They were forced into diversification early and they have done a good job at it." And he believes that Avago – the only other firm in the top four that is not involved in the RFMD-TriQuint merger – is content with its position. He expects the company to do “business as usual" while it focuses on optical, automotive and other markets.

“Once you get passed the [top four], you take a big drop down to the number five company, WIN Semiconductors, and they have a different slant on the business, so I’m not sure there’s enough scale on the handset side for consolidation to make sense. You’d have to have everybody consolidate to make any noise on the handset side."

On the aerospace and defence side, it might be a different story. The new company will be the largest player in aerospace, networks, and defence, and also the leader in aerospace and defence. However, it is not far, far larger than some of its rivals. “It’s $500 million, and Hittite and M/A COM are in the $300 million range, so some companies might talk about consolidation to pose a threat to that entity."

Even if the merger of RFMD and TriQuint doesn’t trigger further consolidation, it will shake up the industry. If the colossus that results draws on the best of both firms, while cutting off the less-good bits, it is definitely going to be a tough competitor in many sectors.

Getting together

Like many relationships, the getting-together of RFMD and TriQuint was far from simple. In fact, in early 2014, it was even possible that TriQuint might have started to engage in a merger with one of two other companies.

The timings of many behind-the-scenes meetings that led to the public announcement of the merger are detailed within an S-4 filing by TriQuint on 14 April.

In this document it is revealed that between spring 2009 and early 2013 representatives of both companies – primarily Bob Bruggeworth, President and Chief Executive Officer of RFMD, and Ralph Quinsey, Chief Executive Officer of TriQuint – met on about eight occasions to discuss their respective views on trends in the RF market, and potential opportunities for a strategic business combination between the two companies. They also exchanged overviews of each company’s businesses and discussed possible cost-saving synergies that might be realized from a business combination.

More recently, the following events have occurred:

- On 25 February, 2013, at the Mobile World Congress in Barcelona, Spain, Quinsey broached with Bruggeworth the concept of a transaction that would create two separate companies: one focused on the mobile market and another based on the infrastructure and defence markets. That week Quinsey also met with the CEO of a third party (referred to as Company B in the S-4 filing) and mentioned a similar transaction concept.

- On April 3, 2013, RFMD formally proposed to TriQuint an all-stock acquisition. This would reflect the market price of both firms, and create two market-focused companies.

- nOn April 12, 2013, TriQuint discussed RFMD’s proposal and concluded that it failed to ascribe appropriate value to the company’s infrastructure and defence business.

- On June 5, 2013, the CEO of Company B delivered an unsolicited letter to Quinsey and the TriQuint board, offering to buy the company in an all-cash transaction at a per share price of $8.25– that reflected an 18 percent premium to TriQuint’s then-current market price.

- On June 11, 2013, the TriQuint board rejected Company B’s proposal. On August 22, 2013, over dinner in Portland Quinsey and Bruggeworth discussed a potential “merger of equals", with each company’s stockholders owning approximately 50 percent of a combined company.

- On November 19, 2013, Quinsey received a letter from Company B, offering to buy the company for a purchase price of $10.00 per share, comprised a mix of 50 percent cash and 50 percent stock. This price represented a 33 percent premium to TriQuint’s then-current market price.

- On November 21, 2013, TriQuint and RFMD started posting due diligence materials into separate virtual data rooms. Five days later they accessed each other’s data room and began conducting due diligence investigations.

- On December 13, 2013, TriQuint’s board decided not to approve the proposed transaction with RFMD. This was based, in part, on concerns regarding the potential market reaction to the transaction in light of both RFMD’s and TriQuint’s expected near-term financial results. The board also asked Quinsey to request Company B to improve its existing offer.

- On December 15, 2013, Company B revealed that it would be willing to increase its offer to $10.10 per share

- On January 31, 2014, Company C expressed preliminary interest in an acquisition of TriQuint in its entirety.

- On January 31, 2014, at the request of Starboard, its representatives met with RFMD CFO Dean Priddy and Bruggeworth. Following a tour of the Greensboro wafer fabrication facilities, representatives of Starboard outlined the strategic rationale for a RFMD-TriQuint merger.

- On February 18, 2014, Company B’s financial advisor informed representatives of Goldman Sachs that it would not re-affirm its last offer from December 15, 2013 and had determined to withdraw from the process.

- On the evening of February 22, 2014, and following notification from Quinsey that the TriQuint board had met earlier that day and unanimously approved the merger agreement, the RFMD board discussed and approved the proposed transaction.





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