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Renesas’s $6.7 Billion Acquisition of IDT

By Jack Briody and Tristan Yang of Columbia University, Dexter Wan (Wharton School) - Date: 24/04/2019

Overview of the deal

  • Acquirer: Renesas - Advisors: Morgan Stanley, Bank of America, and Mizuho Securities

  • Target: IDT - Advisor: J.P. Morgan

  • Estimated value: $6.7bn - Announcement date: September 2018

Renesas Electronics Corporation, the second-biggest supplier of automotive semiconductors by market share, is acquiring Integrated Device Technology, Inc. for $6.7 billion in order to expand its product line. Renesas is specifically looking to explore applications beyond the automotive sector, which currently fuels half its revenue, into data centers and communications devices.

Renesas has the ability to pay for the acquisition with cash on-hand and bank loans and has no plans for equity fundraising. Renesas will pay $49 per share in cash for IDT’s outstanding shares, a 29.5% premium over IDT’s stock price as of late August. Final regulatory approval was given to Renesas in late March, and the deal was closed.

The bulk of the strategic rationale for the deal is Renesas’s desire for IDT’s expertise in analog semiconductors for wireless networks and sensors, a niche knowledge base that plays a crucial role in autonomous driving and connected car technology. Though Renesas has been working on similar products, the company has been unable to develop sensor-based analog chips comparable to IDT’s.

“The combination of Integrated Device Technology’s analog mixed-signal leadership with Renesas’ world-leading microcontroller and automotive/industrial franchise creates a new global powerhouse” - Gregory Waters, CEO of IDT

Company Details (Renesas)

Renesas researches, designs, and manufactures semiconductors, particularly for applications in the automotive, healthcare, energy management, and automation spaces.

- Founded in 2002, headquartered in Tokyo

- President and CEO: Bunsei Kure

- Number of employees: 19,546

- Market Cap: $9.28bn - EV: $9.40bn

- LTM Revenue: $6.90bn - LTM EBITDA: $1.74bn

- LTM EV/Revenue: 1.36x - LTM EV/EBITDA: 5.40x

Company Details (IDT)

IDT is a California-based semiconductor designer, manufacturer, and distributor that operates in the Communications and Computing, Consumer, and Industrial segments.

- Founded in 1980, headquartered in San Jose, CA

- President and CEO: Gregory Waters

- Number of employees: 1,821

- Market Cap: $6.33bn - EV: $6.46bn

- LTM Revenue: $929mm - LTM EBITDA: $237mm

- LTM EV/Revenue: 6.95x - LTM EV/EBITDA: 27.26x

Projections and Assumptions

Short term consequences

Renesas is second only to NXP Semiconductors in auto-related chips, commanding 30% of the global market for microcontrollers used in cars. However, its weakness lies in analog chips which process signals from sound, light or temperature into digital data. By acquiring IDT, Renesas is able to gain access to IDT’s know-how in analog semiconductors for wireless networks and sensors, which is central to the development of autonomous vehicle technologies.

Even though the deal was announced fall 2018, Renesas and IDT have already worked together to develop “Winning Combinations” in the areas of Automotives, Industrial IoT, and Infrastructure. Reports from February state that Renesas plans to lay off as many as 1000 workers in Tokyo; however, these “Winning Combinations” may give Renesas-IDT the ability to avoid heavy job cuts by continuing to dominate in a shrinking industry.

The deal follows Renesas’s relatively recent purchase of Intersil Corporation, another U.S. chipmaker, which has helped Renesas recover from damage suffered at key plants in the 2011 earthquake in Japan. Further, following the acquisition Renesas gained the capacity to serve customers globally, as a decision was made to keep Intersil’s production facility and offices open, respectively located in Palm Beach, FL, and Milpitas, CA.

Long term upsides

Renesas has announced that it is expecting near- and long-term revenue growth from newfound opportunities thanks to product line diversification, access to fast-growing industries, and cost savings from a larger business platform, allowing them to bring in $250 million in non-GAAP operating income per year on a run-rate basis.

Given that Renesas already has a strong presence in the microcontroller market, they gain an even greater foothold in automotive chips, which is an extremely competitive market consisting of many global chipmakers. Bunsei Kure, CEO of Renesas, said that Renesas will “grow in automotive chips, an area that should pay off substantially in the medium to long term.” The Internet-connected automobiles and IoT (Internet of things) devices will help collect vast amounts of data that will hugely benefit Renesas, creating many more business opportunities.

One big plus for Renesas is IDT’s expertise in RF – optical devices for 4G and 5G communication. 5G communication is critical for Adaptive Driver Assistance Systems (ADAS) and self-driving cars. The acquisition by Renesas should also lift IDT’s wireless charging solutions to broad adoption among car OEMs in all types of cars within only two years, as predicted by Greg Waters, President and CEO of IDT.

Risks and Uncertainties

Though Renesas’s outlook on their forecasted gross and operating margins post-acquisition were positive, the figures used in their calculations were IDT’s non-GAAP measures. Under GAAP, the gross margin of IDT is actually 4.9% lower than what Renesas made it out to be. Similarly, IDT’s operating margin is less than half of what was previously stated. This means that Renesas, stated to be paying 29x operating profit of IDT (using non-GAAP measures), is actually paying as much as 60x operating profit. While this multiple could be justifiable for a growth company, it is quite high for a firm that is approaching stagnancy in revenue growth. Further, given that IDT reported a net loss of $12.1M last year, there have been concerns that Renesas may be overpaying for the company.

The acquisition will also affect Renesas’s default risk, potentially downgrading the company’s bond rating due to deterioration in the ratio of debt to operating profit. S&P Global Ratings went so far as to state its intention to put Renesas on a negative credit watch, originally claiming that the firm’s rating may need to be adjusted if the acquisition is completed as per the original terms.

Renesas’s ability to efficiently integrate IDT’s operations into its business is also uncertain. Given the plethora of industry segments that each firm operates in, the combined company will have to find a way to restructure its operations, reallocate resources, and maintain industry relationships simultaneously.

“This acquisition will bring us complementary, market-leading analog mixed-signal assets and an incredibly talented group of professionals to help us boost our embedded solution capabilities...IDT’s products...will enable Renesas to widen its product offerings as well as to expand its reach into areas such as the growing data economy-related space.” -Bunsei Kure, CEO of Renesas

© The MergerSight Group. 2018. All rights reserved.


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