Description

Silicon Motion (SIMO) is an interesting merger arb opportunity.   The deal was announced on 5/5/22.  A summary of key terms from the announcement presentation:

So 93.54 plus .388 shares gets you to around $108 per share or about a 38% spread.  My thesis here is that SIMO is a decent buy at this price regardless of whether a deal occurs.   

SIMO has been written up on VIC twice by specialk992 at levels close to today’s price and once by YCOMBINATOR in 2017.  These writeups provide a good background on the business, but basically SIMO is a fabless semiconductor company that makes controllers for SSD and mobile flash devices.  SSD has grown rapidly, taking share from traditional hard disk drives, and the competition is fairly limited. 

Marvell ( ~$45 bn market cap) is the main competitor.  The storage controller market was historically about half of Marvell’s revenues, but the company has actively diversified its product portfolio through $15 bn of acquisitions over the past 5 years.  Marvell is focused on data center / enterprise, while SIMO has large shares in PC and mobile.  

Marvell is rightly considered a higher end business, but that is reflected in the multiples – 20s for Marvell vs 10x for SIMO.   SIMOs stock was in the 90s at the beginning of the year (strong growth even though  “sold out” based on foundry allocations at TSMC).  

SIMO started a share repurchase program at the beginning of the year and purchased $150mm at an average price of $83 prior to the deal announcement.  When asked about the buyback at a conference, the CFO said “we feel this is something that doesn't take a lot of analysis to say, hey, you've got to buy”.  SIMO is currently trading lower than the pre-announcement price.

Some merger issues to consider:

• $160 million termination fee

• MaxLinear shareholders don’t get to vote

• SIMO shareholder vote scheduled for 8/31

• Virtually no product overlap – HSR already cleared

• Not expensive – <15x earnings at the deal price BEFORE synergies

• May deal announcement – similar to current market conditions

• MaxLinear has grown by acquisition (over $1bn in the last five years)

The “catch” here seems to be Chinese regulatory approval.  SIMO is a Taiwanese company and US / China relations are shall we say "strained" at the moment.  On the plus side, SIMO isn’t a particularly important company, and there are no real competitive issues.  China doesn’t seem to be acting capriciously on the business front (e.g. this week’s audit deal), but I don’t claim to have any real edge here.  It seems to be more than reflected in the price.

Catalyst

Deal progress