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With Cypress Semiconductor’s Merger Drama Ending, It May Offer Way to Offset Market Turbulence

By Nicholas Rossolillo - Mar 13, 2020 at 11:45AM

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For German chipmaker Infineon, there’s still one more small hurdle to finalizing its purchase: China’s regulators.

In late spring 2019, German chipmaker Infineon announced its intent to purchase Cypress Semiconductor (CY) for 9 billion euros, good for a $23.85 per share cash payout to Cypress shareholders. It represented a 55% premium (at last share price before the news) for owners of the volatile Silicon Valley hardware maker, and shares raced higher to within a few percentage points of the offer price.  

While shareholders of both companies approved the tie-up, a regulatory review has meant Cypress has remained independent for the time being -- although shares have held steady above $23 as the expected closure of the sale approached. Close to the inevitable cash-out price, I advised shareholders it was time to move on, and subsequently sold my stake too. 

But the situation was temporarily upended with regulatory drama in early March of this year on a report that U.S. regulators might make a recommendation to the White House to block Infineon's takeover on national security risks. The report put the takeover by Infineon temporarily in doubt and sent Cypress shares down by a third -- close to where the share price was late last spring when the deal was announced. Those who took a chance and bought the dip were rewarded when, a few days later, the Committee on Foreign Investment in the U.S. (CFIUS) went ahead and approved the deal. Cypress stock rallied back up to $23 a share again. What a roller coaster.  

Illustrated charts and data with electronic connections between them

Image source: Getty Images.

With regulators in Europe and the U.S. paving the way for the combination, there's just one more hurdle: Chinese regulators. Reflecting the risk that the kibosh still might get put on the deal, Cypress stock is trading nearly a dollar beneath the $23.85 cash offer -- which would equate to about 4% upside if Infineon can wrap things up. Given the novel coronavirus outbreak and some oil market-driven craziness going on at the moment, Cypress shares are worth revisiting one last time. 

Why China is likely to give the go-ahead

The original reason CFIUS might have been concerned was that Infineon relies on China for about a third of its revenue. This isn't out of the ordinary, though. Even American chipmakers (Cypress included) rely on China for sales and a substantial portion of the manufacturing and supply chain process. So what was the rub?

As fellow contributor Leo Sun pointed out, a small portion (a low single-digit percentage) of Cypress sales are to U.S. defense companies. There has been rising concern and scrutiny in recent years over China's ability to gain access to U.S. tech, especially those technologies used by American military, defense, and other government entities. Germany hasn't followed the U.S. lead in blocking purchases of Chinese hardware (like in the case of Huawei's 5G mobile network hardware), so perhaps there was concern that Cypress intellectual property might get into the hands of Chinese competitors.  

However, CFIUS's concerns were likely allayed as Cypress' capabilities are also offered by other chipmakers, so the regulator signed off on the deal. Chinese regulatory scrutiny has been equally elevated on deals that could go the opposite direction -- like when it blocked U.S.-based Qualcomm from taking over Dutch chipmaker NXP Semiconductors back in 2018 during the U.S.-China trade war spat. On deals going the other direction, though, China is very likely to be in agreement. That's the case here with Infineon taking over Cypress.  

A short-term place to stash some cash?

With the market in turmoil at the moment and many investors likely raising cash, Cypress stock doesn't look like a terrible place to store some money that is sitting on the sidelines. Shares have about 3% to 4% upside from here if Infineon can clear this final hurdle, and should things drag out for a while, Cypress is still paying its $0.11 per share per quarter dividend. That's good for another 0.5% gain. Shareholders of record at the end of March 26 get the payout on April 26.  

It isn't a long-term play, but Cypress Semiconductor stock thus looks like a good short-term bet for those looking to ride out the storm.

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