Image source: Cavium Networks.
(NASDAQ: CAVM) and
(NASDAQ: QLGC) sharply diverged on Thursday following news that
the former is acquiring the latter. Cavium stock was down about
16.5% at 11 a.m. EDT, while QLogic's had jumped 10% higher.
Cavium, which sells a wide range of processors used in
networking, storage, and security products, agreed to pay $15.50
per share for QLogic, a network equipment vendor. Upon completion
of the deal, QLogic shareholders will receive for each share $11
in cash and 0.098 shares of Cavium common stock. The transaction
values QLogic at roughly $1.36 billion.
The combination will allow Cavium to offer complete end-to-end
solutions to enterprise customers. The company estimates that the
QLogic deal increases its total market opportunity by more than
$2 billion. About $45 million of annual cost synergies are
expected to be realized by the end of 2017, and the deal will add
between $0.60 and $0.70 to Cavium's 2017 non-GAAP earnings per
share, according to the company.
Cavium CEO Syed Ali pointed to the benefits of the deal:
Today's acquisition of QLogic is highly
complementary and strategic to Cavium and it
creates a diversified pure-play
infrastructure semiconductor leader. QLogic's
industry leading products extend our market position in data
center, cloud and storage markets, and further diversifies our
revenue and customer base. In addition to the compelling
strategic benefits, the manufacturing, sales and operating
synergies will create significant value for our
Cavium is paying a high price for QLogic, and investors don't
seem to be thrilled with the acquisition. QLogic's revenue has
gone nowhere over the past decade, and its profitability has
tumbled. Share buybacks have helped buoy the company's EPS, but
most of the numbers are moving in the wrong direction.
QLGC Revenue (Annual)
QLogic does have $355 million of cash and no debt, so Cavium
is paying about $1 billion for the business itself. That's a bit
more than twice sales and roughly 22 times fiscal 2016 earnings.
That's not an outrageous price, especially if the combination
allows QLogic to boost margins and return to growth. But Cavium
investors don't seem confident in that outcome, punishing the
stock on Thursday.
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