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Morningstar | Rumors Solidify as Cypress Announces Sale to Infineon; Raising FVE to $21

On June 3, German chipmaker Infineon announced an agreement to purchase Cypress Semiconductor for $23.85 a share, or a total enterprise value of approximately $10 billion, after rumors of a sale the previous week. While the two firms have overlapping end markets, technologically, the two are distinct. Cypress (through its merger with Spansion in 2015) has a portfolio of microcontrollers, flash products, and a growing portfolio of connectivity solutions, while Infineon is a large player in power chips.

Management expects the acquisition to close in early 2020 pending approval from regulatory bodies in the U.S., Europe, and, China. Infineon was previously blocked from purchasing Cree’s power and radio frequency chip business, Wolfspeed, in 2017 after the Committee on Foreign Investment in the United States determined that it posed a risk to U.S. national security. While we believe national security concerns should be significantly diminished in the case of Cypress because of the type of technologies being acquired, elevated geopolitical tensions between the U.S., its allies, and China remain cause for significant concern. As a result, we assign a 70% probability of this acquisition being approved and will raise our fair value estimate to $21 per share to account for our expectation of a deal being completed. Shares are currently trading at only a slight premium to this new fair value estimate, and investors would be wise to realize gains, since the deal might not be approved, and we don’t know of any other bidders, especially at the premium Infineon is paying. At a 46% premium to Cypress’ average stock price between April 15 and May 28, this is a relatively costly purchase from Infineon, and we would be surprised if a bidding war broke out.