Audio chip maker Cirrus Logic (NASDAQ:CRUS) saw shares pop nearly 7% today, after announcing that it would acquire competitor Wolfson Microelectronics for $470 million. That price tag represents a 75% premium to what the Edinburgh-based company traded for on the London exchange yesterday, and will be funded by Cirrus through current cash as well as $225 million in debt. Cirrus expects this to be immediately accretive to earnings as of the first full quarter after the deal closes.
In this segment from Tuesday's Tech Teardown, host Erin Kennedy and Motley Fool tech and telecom bureau chief Evan Niu discuss the most likely reason behind the deal, diversification away from reliance on Apple (NASDAQ:AAPL), which currently makes up 80-90% of Cirrus' revenue. The move could also potentially position Cirrus better for playing a role in the expanding wearable device market, as well as the much-discussed "Internet of Things." However, Evan also expresses some concern. Ideally, synergies between the two companies would cause meaningful cost savings, but with the two companies being located so far apart, cost savings could be tiny compared to current combined operating expenses, meaning the 75% premium paid could have been a bit high.
Erin Kennedy owns shares of Apple. Evan Niu, CFA owns shares of Apple. Evan Niu, CFA has the following options: long January 2015 $460 calls on Apple and short January 2015 $480 calls on Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Cirrus Logic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.