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Why ON Semiconductor Dropped $1 Billion to Acquire Connectivity Technologist Quantenna

By Nicholas Rossolillo – Apr 5, 2019 at 9:21AM

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The power management chipmaker is doubling up on connectivity.

ON Semiconductor (ON -3.90%) recently announced its intention to acquire WiFi technologist Quantenna (QTNA), giving the smaller outfit's shareholders a nearly 20% boost from pre-deal announcement prices. With Quantenna's trailing 12-month revenue at just $220 million, the $1 billion price tag looks steep. WiFi hardware is growing, though, and Quantenna is helping lead the charge in making the connectivity tech better. Here's what ON has in mind.

High-performance, high-growth Wi-Fi

Quantenna develops new WiFi solutions, boosting speed and connection reliability and opening up new uses for the technology as the internet continues to evolve. One of Quantenna's capabilities, multi-user MIMO (multiple-input multiple-output), may sound familiar; MIMO is one of the core technologies powering new 5G mobile networks, enabling multiple data signals via the same radio channel. The small semiconductor manufacturer also develops software services along with its chips to help its end customers put MIMO WiFi to use.

Quantenna's solutions are getting put to use in multiple disciplines like smart-home devices, wireless internet service, and business wireless internet needs. Sales are growing fast, too. 2018 revenue increased 25% over 2017 to $220 million -- including a 52% year-over-year increase in the fourth quarter -- and adjusted earnings for the full year were up 104%. In fact, since the stock went public in late 2016, revenue has nearly doubled.

That's a big reason why ON settled on Quantenna. ON does think there will be $26 million in annualized synergy between the two operations one year after the deal closes (which is expected to occur during the second half of 2019), but cashing in on the fast-growing high-performance WiFi industry could help ON continue its own pace of expansion (6% revenue and 34% adjusted earnings growth in 2018). Plus, given ON's gross profit margin of 38.1% on its $5.88 billion in sales last year, Quantenna's 49.6% gross profit will help pull up ON's gross margin a bit.

A couple on a couch with a tablet connected via WiFi to a TV.

Image source: Getty Images.

A complementary asset

ON doesn't plan to let the Quantenna tech go it alone, though. ON has sizable scale providing power management and Bluetooth chips to automakers, industrial companies, and mobile network providers. WiFi semiconductors will now get added to the mix, and ON thinks it will have cross-selling opportunities from existing customers. That's particularly the case in the auto industry, where electric vehicles and new connectivity options are on the rise.

Besides cross-selling, ON also thinks its larger sales channels will also help Quantenna accelerate in the years to come. That's an important point since total MIMO WiFi chipset sales are expected to grow at a 27% annual rate through 2022. The company's total addressable market for WiFi products will double from $2 billion to over $4 billion between now and 2022 as well. Quantenna only musters a small fraction of the overall market now, but plugged into the ON ecosystem, it could benefit from a growing WiFi market and market-share increases.

Thus, the $1 billion going price for Quantenna looks expensive right now, but if well executed, it could be a huge growth engine for ON Semiconductor in the years to come.

Nicholas Rossolillo and his clients own shares of ON Semiconductor. The Motley Fool owns shares of Quantenna Communications. The Motley Fool has a disclosure policy.

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