Vice President: Devansh Jain, Deepansh Kalra, Chirag Agarwal
Analysts: Amal Tharikh, Sai Vinesh, Kshirja, Nidhi Singh, Veer Jindal, Yuvraj Gill, Gautam Bansal, Sarthak Paul
Report by: Aastha Gupta, Samanvi Jain
Deal Overview
Acquirer: Renesas Electronics Corporation.
Acquiree: Altium Limited
Deal Size: $5.9 billion
Buy Side Advisors: DLA Piper, Covington & Burling, Nagashima Ohno & Tsunematsu
Sell Side Advisors: King & Wood Mallesons, Reed Smith
Introduction
Japan's Renesas Electronics said it would buy electronics design firm Altium for $5.9 billion in cash, as the acquisitive automotive chipmaker looks to offer digital device design to customers. The acquisition places Renesas at the forefront of dealmaking and investment in Japan's chips industry, with the government making efforts to improve competitiveness and boost supply chain resilience against geopolitical shocks. Renesas, which manufactures chips for automakers such as Toyota and Nissan aims to provide device design through the purchase of Altium, which offers digital tools for engineers and designers devising circuit boards. Altium CEO Aram Mirkazemi told the news conference that this deal is going to help them execute at a faster pace. Renesas has offered $68.5 per Altium share and said it will finance the purchase with cash on hand and bank loans.
Renesas Electronics Overview
Renesas Electronics Corporation, headquartered in Tokyo, Japan, has 12 manufacturing facilities in Japan, China, Southeast Asia, and the US and delivers embedded design innovation with complete semiconductor solutions. A global leader in microcontrollers, analog, power, and SoC products, Renesas provides comprehensive solutions for a broad range of automotive, industrial, home electronics, office automation, and information communication technology applications. In FY23, Renesas became one of the top three suppliers of embedded semiconductor solutions and increased market capitalization six-fold compared to January 2022.
Net revenues for this Business Period decreased by 2.2% year-on-year to $9.9 billion. This was mainly attributable to the decrease in revenue from industrial, infrastructure, and IoT businesses due to the softening of the PC/mobile phone and consumer markets, etc. However, revenue from the automotive business increased due to the effect of yen depreciation.
Gross profit for this Business Period decreased by 0.17 billion (3.0%) year-on-year to 5.66 billion (gross margin of 57.0%). This was due to the decrease in sales revenue from the industrial, infrastructure, and IoT businesses as mentioned above, and the resulting deterioration in the product mix.
Operating profit for this Business Period decreased by $0.39 billion (10.3%) year-on-year to $3.39 billion (operating margin of 34.1%). This was mainly due to the above-mentioned decrease in gross profit and increase in R&D expenses.
Renesa’s primary competitors are Diodes, Nexperia, NVIDIA, ROHM, NXP Semiconductors, Vishay, and many other prominent global players. In summary, Renesas Electronics Corporation remains at the forefront of semiconductor innovation.
Altium Overview
Altium Limited, an American-Australian multinational software company, specializes in providing electronic design automation (EDA) software for engineers designing printed circuit boards (PCBs). Founded as Protel Systems Pty Ltd in Australia in 1985, Altium has grown into a global market leader with its flagship product, Altium Designer, the number one PCB software tool in use today.
Altium made important strides in 2023 toward its aspirational $500 million revenue target for FY26 and its ambitious vision to transform the electronics industry. Altium revenue increased 19.2% to $263.3 million for the financial year 2023. Reported earnings before interest, tax, depreciation, and amortization (EBITDA) were $96.0 million, and the reported EBITDA margin was 36.5%.
After excluding the foreign exchange gain from the shutdown of operations in Russia and foreign exchange loss on the revaluation of a receivable balance from the Australian Tax Office (refer to Note 30 of the financial statements for details), the underlying EBITDA margin was 36.2% compared to the underlying EBITDA margin of 36.7% in the prior year.
Recurring revenue grew to 77.3%, up from 75.4% in the prior year. The increase in recurring revenue of 1.9 percentage points was supported by an increase in term-based licenses for Altium Designer, an increase in the number of seats on subscription with a higher percentage of Professional and Enterprise subscription levels, and continued growth of Octopart in search, marketing, and API segments.
Altium operates two unique business units, which are complementary and synergistic. Altium Design Software provides PCB design solutions and indirectly enhances the value of Altium 365 through the subscriptions associated with the PCB design tools. Altium Cloud Platform provides professionals and industry partners access to a vast ecosystem of electronic design and manufacturing users and customers. With continuous R&D in PCB design, a straightforward capital structure, and transparency with investors, Altium is well-positioned for future growth.
Industry Analysis
With its influence extending to nearly every facet of business and people's lives, semiconductor businesses are pivotal to technological innovation, finance, geopolitics, and human inventiveness. But things have been anything but smooth sailing for the last several years.
Still feeling the effects of the chip shortage issue, manufacturers are under pressure to fortify an already shaky supply chain in the face of ever-increasing demand. Some challenges the semiconductor market encounters include geopolitical conflicts that cut off energy sources, fears of a recession, record-high inflation, and a competitive labor market that makes it hard to find and keep talented employees.
The global semiconductor market encountered sluggish growth from 2018 to 2023, with a decrease observed in 2023.
In 2023, Asia-Pacific, which accounted for the main source of semiconductor demand, was followed by the US, Europe, the Middle East, and the Rest of the World. The COVID-19 epidemic, trade tensions, supply chain disruptions brought on by geopolitical conflicts like the Russia-Ukraine war, and other factors contributed to the stifled growth.
Despite the challenges, the industry generated $507.4 billion in revenue in 2023, with a 1.4% compound annual growth rate (CAGR) from 2018 to 2023. Notably, the US and Asia-Pacific markets had compound annual growth rates of 1.6% and 3%, respectively, with revenues expected to reach $92.3 billion and $355.4 billion in 2023.
The Integrated segment dominates the semiconductor market, comprising 82.4% of its total value, reflecting semiconductors' critical role across various sectors like image sensors, automotive, AI, IoT, and 5G networks.
Market growth, driven by technologies such as AI, VR, IoT, electric vehicles, and 5G networks, escalates semiconductor demand and competition, including from Chinese companies like SMIC. This fuels merger and acquisition activity, while automation, electrification, and security boost demand for car semiconductor devices.
Despite challenges like high entry costs and environmental concerns, opportunities exist in emerging technologies like graphene-based semiconductors, fostering partnerships for market growth.
Increasing demand for electronic devices and advancements like AI smartphones drive preference for integrated semiconductors. The semiconductor industry faces shifts towards IoT, with projections of continued growth and advancements, though Moore’s Law's pace is faltering.
Global semiconductor industry growth is projected at a 5.3% CAGR from 2023 to 2028, reaching $656.2 billion. Sustainability initiatives, including in fab facilities, aim to enhance performance and environmental outcomes. The industry also focuses on meeting the demand for chips in emerging areas like the metaverse, automotive, and healthcare.
DEAL RATIONALE
Revenue Synergy
The Renesas-Altium merger has the potential to unlock significant revenue synergies through several avenues. Firstly, the combined entity will possess a broader market reach, as Renesas' established semiconductor presence is coupled with Altium's strong software market position. This allows them to target a wider range of customers and potentially increase sales. Secondly, cross-selling opportunities arise. Renesas can leverage its customer base to introduce Altium's design software, and vice versa, leading to increased sales of both companies' products. Additionally, the combined expertise of both companies can lead to the development of innovative design solutions that cater to emerging market needs, potentially creating new revenue streams. Lastly, by simplifying the design process and lowering barriers to entry, the proposed platform could attract new customers and expand the overall design market, benefiting both Renesas and Altium.
Cost Synergy
The merger also presents potential cost synergies through operational streamlining and resource optimization. Merging operations could eliminate duplicate functions in areas like administration, finance, and human resources, resulting in cost savings. Renesas can use Altium's design software across its internal operations, potentially reducing licensing costs for other software and streamlining design workflows. Additionally, both companies can benefit from economies of scale by sharing resources like infrastructure, research and development facilities, and marketing efforts. Furthermore, if implemented efficiently, the integrated platform could streamline design workflows, reducing development time and associated costs. These potential cost synergies could contribute to improved profitability for the combined entity.
Risks
The acquisition of Altium by Renesas, a semiconductor company, presents both promising opportunities and notable risks. Merging two sizable entities with disparate cultures and software ecosystems inherently involves complexities and lengthy integration processes. Altium's absence of significant debts or pending litigations mitigates immediate legal and financial concerns for Renesas. However, Renesas' limited experience in managing intricate software products akin to Altium's poses risks in effectively steering Altium's operations post-acquisition. Altium's renowned open design environment, which facilitates collaboration with diverse component vendors, may need help if Renesas prioritizes its proprietary components within Altium's software, potentially constraining innovation and engineering choices.
Moreover, Renesas must carefully preserve Altium's user-friendly interface, robust features, and adaptability, as any deviation may lead to user discontent. Retaining Altium's top-tier R&D talent is imperative for sustained software development and quality post-acquisition, necessitating Renesas to prioritize talent retention strategies amidst the change in organizational leadership.
Deal Valuation
Precedent Transaction Analysis
Broadcom - Vmware (Nov-23): Broadcom acquired Vmware for $59.3 billion in November 2023. The deal valued Vmware at 25.76x its LTM revenue and 48.89x its LTM EBITDA. This was a premium of 42.24% to Vmware's stock price one day before the announcement.
Googie LLC - Mandiantinc (Mar-22): Googie LLC acquired Mandiantinc for $5.05 billion in March 2022. The deal valued Mandiantinc at 9.46x its LTM revenue. Mandiantinc did not have positive LTM EBITDA at the time of the acquisition. This was a premium of 22.70% to Mandiantinc's stock price one day before the announcement.
International Business Machines Corp. - Red Hat (July 19): International Business Machines Corp. acquired Red Hat for $30.7 billion in July 2019. The deal valued Red Hat at 6.15x its LTM revenue and 33.75x its LTM EBITDA. This was a premium of 62.84% to Red Hat's stock price one day before the announcement.
NVIDIA Corporation - Mellanox Technologies, Inc. (Jun-19): NVIDIA Corporation acquired Mellanox Technologies for $7.02 billion in June 2019. The deal valued Mellanox at 4.20x its LTM revenue and 16.20x its LTM EBITDA. This was a premium of 38.98% to Mellanox's stock price one day before the announcement.
Renesas Electronics Corp - Integrated Device Technology, Inc. (Sep-18): Renesas Electronics Corp. acquired Integrated Device Technology for $6.7 billion in September 2018. The deal valued Integrated Device Technology at 6.95x its LTM revenue and 27.26x its LTM EBITDA. This was a premium of 29.49% to Integrated Device Technology's stock price one day before the announcement.
DCF
Income Statement
Comps Model
Renesas, a Japanese company, acquired Altium, an electronics design firm, for AUD 5.9 billion in cash at a price of AUD 68.5 per share, representing a 34% premium over the previous day's closing price per share. Based on our valuation methods, this premium corresponds to a share price of AUD 87.64 (using the EBITDA method) and AUD 45.72 (using the Perpetuity method). Altium's share price had been relatively stable around AUD 30, but it saw a steady increase over the past year, reaching AUD 51 before the acquisition deal. This growth aligns with Altium's consistent increase in net revenue, which likely influenced Renesas' decision to offer a premium. Overall, the deal appears to be fairly valued, with the average of the two terminal value methods resulting in a share price of USD 66.68.
Conclusion
Overall, the acquisition signals Renesas' commitment to expanding its capabilities and market presence through strategic acquisitions, aligning with Japan's broader trend of outbound mergers and acquisitions. Renesas' history of successful mergers and acquisitions, coupled with its focus on overseas expansion, suggests a proactive approach to addressing challenges and seizing opportunities in the global semiconductor market.
References
1. www.renesas.com. (n.d.). Renesas Chooses Altium to Unify Company-Wide PCB Development and Accelerate Solution Design for Partners and Customers | Renesas. [online] Available at: https://www.renesas.com/us/en/about/press-room/renesas-chooses-altium-unify-company-wide pcb-development-and-accelerate-solution-design-partners
2. Condie, S. (n.d.). Altium Agrees to $5.9 Billion Takeover by Japan’s Renesas. WSJ. [online] Available at: https://www.wsj.com/business/deals/japans-renesas-electronics-to-buy-altium-for-5-9- billion-01808ea6.
3. www.linkedin.com. (n.d.). Altium to be bought by Japanese chipmaker Renesas for nearly $US 6Billion. [online] Available at: https://www.linkedin.com/pulse/altium-bought-japanese-chipmaker renesas-nearly-us-monica-schnitger-yside/
For a comprehensive view of the Discounted Cash Flow (DCF) analysis, please refer to:
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