Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Knowles (NYSE:KN) were trading 6% lower as of 1:55 p.m. Thursday following an opening-bell plunge that shaved 10% off share prices. The stock's woes stem from investor skepticism regarding Knowles' acquisition of struggling audio-chip maker Audience.
So what: Audience, which reported its first-quarter financial results simultaneously with the acquisition announcement, saw revenue fall by 49%, and adjusted earnings crater by 156%, from the year-ago quarter. Audience has struggled mightily since its ouster as an Apple supplier three years ago. Since the end of 2012, its trailing-12-month revenue has dropped by 21%, its shares have lost half their value, and EPS has been decimated, falling from profitability into a very deep hole full of red ink.
Knowles will pay $5.00 per share for Audience. Half will be paid in Knowles stock and the other half will be paid in cash, all for a stock that's actually trading at only $4.75 today after it crashed by more than 13% following its two announcements this morning.
Now what: Analysts panned the deal, with Stephens analyst Harsh Kumar noting that "Knowles has struggled to execute on its own, and this deal ... will only dilute their concentration." Knowles, however, believes that the acquisition will help it save $25 million per fiscal year, and should add to earnings by the end of 2016. The market's reaction supports Kumar's assertion more than that of Knowles' executives, and so do the financials. A combined Knowles-Audience would have suffered $160.6 million in net losses, and bled out $33.3 million in negative free cash flow, over the course of 2014. Adding $25 million to either result still produces a loss, and that's not encouraging in the least.