Atmel: This Deal Is Doomed

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Great products aren't enough to save a troubled business. Atmel (Nasdaq: ATML) is learning this the hard way, as two rival semiconductor designers are set to tear the company apart and devour the choicest morsels.

Microchip Technology (Nasdaq: MCHP) and ON Semiconductor (Nasdaq: ONNN) have launched a public and hostile bid for Atmel, looking to pay a total of $5 a share for the troubled chip maker. Five years of sluggish sales growth and fragile profit margins have tested the patience of Atmel's shareholders, and around a 14% price drop in those five years didn't help much, either.

But like I said, the company sits on a solid technology portfolio and both of its prospective buyers plan to turn a profit from their new assets in the first year. ON wants Atmel's memory products to complement the pending acquisition of Catalyst Semiconductor (Nasdaq: CATS) along with some radio frequency chip solutions to fill out its own product lines. Microchip just wants the microcontroller business to boost its profile in a fragmented market where giants like Texas Instruments (NYSE: TXN) and Intel (Nasdaq: INTC) loom large. The highly specialized ASIC chips and automotive designs will be sold off to the highest bidder, because these segments are unprofitable today and neither bidder knows those areas all that well.

You'd think that Atmel's shareholders would jump at this chance to grab an immediate 25% premium over Friday night's closing price, but the shares haven't moved anywhere near the $5 mark today. That's usually a sign of pessimistic shareholders, because someone out there is willing to sell their shares for less than the promised buyout price. The current credit crisis isn't enough to push Atmel into a deal either, because the company has a solid balance sheet with over $375 million in cash equivalents and total debt of only around $150 million.

Atmel CEO Steven Laub promises to do "what is right for our shareholders, customers, partners and employees," and claims "significant progress" in his two years of turnaround efforts. Well, Atmel, with its 19% drop, has performed worse than the S&P 500 since Laub took Atmel's helm, so it is not clear to me that investors agree with him.

Hostile takeovers are a tricky business -- just ask Microsoft (Nasdaq: MSFT). Some consolidation in the microchip industry makes sense right now, but I don't think that this particular deal will make it. Regroup and try again later, guys.

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