Chip-design software company Synopsys (Nasdaq: SNPS ) announced Monday that it will acquire Monolithic System Technology (Nasdaq: MOSY ) for $13.50 a share in a half-stock, half-cash deal expected to close in May.
I think Synopsys got ripped off, though. Here's why, in a nutshell.
Monolithic (MoSys) was trading at $7 a share before the deal was announced. So, start with the assumption that $7 was reasonably close to a fair valuation. Why would Synopsys believe the company is worth nearly double what the market thinks it's worth? MoSys isn't worth $13.50 a share. To prove my point, let's take a look at the deal.
There are no synergies created by this transaction. That is, this is not a case of a poorly run outfit being spared from a lingering, painful death by a larger organization that can run it more efficiently by combining operational efforts. It's simply a diversification deal on the part of Synopsys.
MoSys is worth no more under Synopsys' ownership than it was on its own. Synopsys says that it will be able to grow the MoSys business by leveraging its distribution network to increase sales. Perhaps. But as one analyst said -- and I agree-- companies looking for high-end, specialized chips know where to get them, and already know about MoSys. Therefore, Synopsys' ability to increase distribution is limited.
Sure, it's a great deal if you were holding MoSys stock when the acquisition terms were announced. As for Synopsys shareholders, it's nothing but a drag on your shares.
Share prices aside, it does make good business sense for Synopsys to move into chip manufacturing. And, the company can probably improve its chip-making software via the firsthand experience of manufacturing MoSys chips. But that's not enough, in my mind, to justify the premium.
When I read the press release announcing the deal, I was hoping to see some hidden nugget of information about why the two companies are such a great fit, or how they plan to combine marketing strategies or licensing deals. But, alas, I was disappointed. The release offered little more than scientific mumbo-jumbo about how Systems-on-Chips (SoC) technology reduces power consumption.
Well, that's great, and I'm all for extending the battery life of my PDA. But I don't see how keeping my PDA alive a little longer makes MoSys worth an 85% premium.
The deal appears to lack clarity and direction. There's no doubt that the market for SoC products will experience strong growth, but paying such a massive premium sure does cut into the profits derived from that growth.
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Mark Mahorney is a realist amidst infinite realities. He doesn't own shares of any of the companies mentioned.
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