Chipmaker RF Micro Devices (UNKNOWN:RFMD.DL) had started the year on its back foot after releasing unimpressive third-quarter results. However, the company received a boost when it was announced that it will be merging with another chipmaking company, TriQuint Semiconductor (UNKNOWN:TQNT.DL).
A smart deal
Under the terms of the deal, RF will buy TriQuint for $1.6 billion, ultimately creating a new company. The companies are a great fit for one another. RF Micro has got solid presence at Samsung, and TriQuint derives almost half of its revenue from Apple (NASDAQ:AAPL). The combination of the two companies is also expected to result in cost benefits in the millions. This is a win-win deal, as the combined RF Micro and TriQuint will be in a solid position to benefit from growth in smartphone shipments.
Moving forward, RF Micro is anticipating growth in revenue as a result of design wins in marquee smartphones and tablets. The company's shares saw strong gains after Apple released its second-quarter results. RF Micro had benefited after design wins in Apple's iPhone 5s and 5c. According to Canaccord, RF Micro had gained dollar content in Apple's iPhones last year. If this trend continues this year, then the new company could see some big upside.
Throughout the year, there has been a strong buzz that Apple will launch two iPhones with bigger screens. According to Brian Marshall of ISI Group, the introduction of a big-screen iPhone 6 should lead to "massive upgrades" and bring in a sizable number of Android users into Apple's ecosystem. So, Apple's product development can turn out to be a big boost for RF Micro.
In addition, since TriQuint is also a key Apple supplier, RF Micro should see more gains once their merger is complete.
RF Micro is focusing on a flexible sourcing strategy to reducing gas and silicon costs. In addition, RF is also adding assembly capabilities to reduce packaging costs by reducing its use of precious metals in manufacturing. The company is also leveraging its new higher-unit volumes across its supply chain to reduce costs.
Apart from mobile devices, RF Micro is looking at multiple growth drivers. It expects the Internet of Things, automotive Wi-Fi, and wearable gadgets to drive its business in the future. RF is also encouraged by the adoption of new technologies by consumers. For example, the shifting preference of users from 2G to 3G smartphones in certain developing countries is good news for the company, since the 3G components carry higher margins.
On the other hand, with the growth of new technologies such as envelope tracking, carrier aggregation, and transmit MIMO, RF Micro's dollar-content opportunities are improving. Besides these, the introduction of LTE, along with LTE Advanced, is another factor that could lead to an increase in demand for RF Micro's connectivity solutions.
In the low-cost product segment, RF Micro's ultra-low-cost CMOS power amplifiers are being adopted at a good pace in next-generation handset platforms in emerging markets. Moreover, the company is anticipating margin growth as a result of customers' migration to ultra-low cost products going forward.
RF Micro Devices is looking like a profitable bet from all angles. The company's impending merger with TriQuint Semiconductor will greatly enhance its performance, as the combined company will benefit from two big smartphone companies. The flagship products of both Apple and Samsung should drive growth, and at the same time, the expected cost synergies will result in a better bottom-line performance in the future.
Investors will be making a smart choice if they decide to invest in RF Micro before its merger with TriQuint.
Mukesh Baghel has no position in any stocks mentioned. The Motley Fool owns shares of Apple and TriQuint Semiconductor. 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.