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What: Shares of Vitesse Semiconductor (UNKNOWN:VTSS.DL), a supplier of integrated circuits used in networking applications, surged on Wednesday after it was announced that Microsemi (NASDAQ:MSCC) was acquiring the company. The stock was up 36% by noon, equal to the premium paid my Microsemi.
So what: Microsemi will pay $5.28 per share, or $389 million total, to acquire Vitesse. The combination will create immediate EPS accretion and synergies, according to the press release announcing the acquisition. While Microsemi is profitable on a GAAP basis, Vitesse has been unprofitable in almost every year in the past decade.
Microsemi CEO James J. Peterson had this to say about the deal: "This acquisition is further evidence of Microsemi's continuing commitment to grow as a communications semiconductor company. Vitesse's highly complementary technology suite will expand our product offering and accelerate growth with differentiated technology in emerging markets, while benefiting from the increased scale, consolidated infrastructure and cost savings of the combined entity."
Now what: The deal is expected to close during the second quarter, and Microsemi expects it to contribute an additional $0.16-$0.20 in per-share earnings by the first full year after close. Microsemi has been extremely acquisitive in recent years, spending a total of nearly $1.5 billion in the past five years on acquisitions, excluding the Vitesse deal. Microsemi stock was up just slightly on Wednesday.
Consolidation of smaller companies is inevitable in the semiconductor business, but investors should be aware that the promised synergies related to acquisitions often aren't realized. Despite all of Microsemi's acquisitions in the past few years, the company's earnings have been declining, and it's very possible that the Vitesse deal will produce similar results.