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Tuesday, August 15, 2006

Are Chip Companies For Sale?


The New York Times reports today that cash rich chip companies may be the next target of private equity firms. Apparently the KKR bid for Philips semiconductor unit has private equity shopping. Based on free cash flow, Merrill Lynch is saying that Symtech, Intersil, Analog Devices, and Linear Techologies are the most likely candidates.

Dream on.

Semtech is taking charges due to options backdating. Its SEC filings are late. Litigation and the cost of the options review could run into millions of dollars. And, the SEC is looking into the backdating of options. Perhaps the Justice Department will get into the fray. It is, in short, the last thing a private equity firms needs.

Intersil has said that there is softness in its "computing and several consumer related products, which is limiting our visibility into the third quarter." The company's growth has slowed considerably over the last three consecutive quarters. And, the company trades at 4.6 times revenue.

Now, lets take Linear. It faces a lawsuit contending the its directors cannot properly evaluate whether its stock options grants were done properly. Why? Because some of the diretors' grants look a little out of the ordinary. The law firm checking into the grant employees a partner who himself is named in investor lawsuits about option grants at other companies.

Linear's revenue and operating income have also slowed over the last four consecutive quarters and the company trades at 8.7 times revenues.

Except for Analog Devices recent pitiful results, it may be the one company that should be on the list. The company's just releases quarter showed earnings rose to $145 million from $121 million a year ago. But, the company added that sales in the current quarter will be flat. The company does have a fairly low ratio of sales to market cap of four times. It also carries about $2.7 billion in cash on its balance sheet against a $10 billion market cap. So, maybe ADI is a target.

As for the other three companies, unlikely.

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