Shares of DSP Group (DSPG) were up 17.5% as of 1 p.m. EDT. The small fabless semiconductor designer is being acquired by larger peer Synaptics (SYNA -1.36%) for $22 per share (a premium to where the stock closed last Friday, thus the 17.5% jump higher), which will be payable in cash to DSP Group shareholders should they approve the merger.
The total purchase price for DSP Group represents an enterprise value of about $400 million (market cap of $532 million, minus cash and equivalents of $129 million DSP had on hand as of the end of June). Synaptics has enough liquidity to afford the purchase (cash and equivalents of $836 million as of the end of June), but that was offset by debt of $881 million at the end of its last quarter. Shelling out more cash for DSP will further weaken Synpatics' balance sheet for now, but it's profitable so it should replenish that cash in short order.
Nevertheless, DSP represents a small and potentially lucrative addition for Synaptics. Though DSP generated free cash flow of just $12 million over the last trailing-12-month stretch, the total purchase price is just over three times DSP's sales in the last year. Pairing up with Synaptics' broader array of mobile connectivity solutions could help both businesses long-term as the semiconductor industry continues to consolidate.
As to specific rationale for the purchase, Synaptics said DSP's wireless voice-processing chip designs will be added to its own Katana edge AI platform for smart home and smart office devices. This builds on Synaptics' goal of increasing its role as a supplier of Internet of Things devices. As a reminder, Synaptics acquired Broadcom's small wireless IoT business and video compression software technology outfit DisplayLink last summer.
Within a year of the DSP merger, Synaptics thinks the combination will yield some $30 million per year in synergies via cost savings and cross-selling opportunities. Semiconductor companies have been merging with each other to consolidate the circuitry and software they sell to device manufacturers, so this recent move on Synaptics' part is in keeping with this industry trend to increase sales and boost profit margins over time.