PMC Bites a Bit of Agilent
That division is in the process of being sold to private investors Kohlberg Kravis Roberts & Co. (KKR) and Silver Lake Partners for $2.66 billion in a deal expected to close in December (See Agilent Launches Extreme Makeover and Agilent Readies SPG Sale.)
Once that closes, PMC would purchase what's called the Agilent I/O Solutions division from KKR and Silver Lake for $425 million in cash. PMC's deal includes the I/O division's 240 employees, split among Santa Clara, Calif.; Roseville, Calif.; and Singapore. PMC expects to complete the deal in January 2006. (See PMC to Acquire Agilent .)
PMC stock was up 50 cents (8%) at $6.84 in late morning trading.
PMC wasn't exactly subtle dropping hints about a pending deal. CEO Bob Bailey suddenly started talking about acquisitions during last week's earnings call, noting that the company might have to raise extra money for any purchases. The next day, PMC launched an offering to raise more money, bringing its cash level to roughly $600 million. (See Is PMC Storage Shopping? and PMC Prices $225M Offering.)
The Agilent division represents a business that is "profitable and growing," with yearly revenues exceeding $100 million, Bailey said on a conference call this morning. (Nasdaq: CSCO), EMC Corp. (NYSE: EMC), and possibly Hewlett-Packard Co. (NYSE: HPQ) could each represent more than 10 percent of PMC's revenues after the acquisition, PMC officials said.
The deal furthers PMC's move into storage, a shift begun three years ago when the company's communications chip franchise was suffering. Rivals Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC) and Vitesse Semiconductor Corp. (Nasdaq: VTSS), socked by the same tough market, have made similar inroads into storage. (See Chip Trio Faces Post-Bubble Blues and AMCC Moves Into Storage.)
The Agilent deal would bolster PMC's standing in Fibre Channel by giving the company a line of controllers. PMC already sells Fibre Channel loop switches, "but that business is going away because those are getting integrated into ASICs," Bailey said on the call.
Loop switches are one of the few areas of overlap between PMC and the Agilent division. "If you look at it, the products line up beautifully," Bailey said.
Analysts questioned the price tag, noting that it's roughly 3.8 times sales. By comparison, QLogic Corp.'s (Nasdaq: QLGC) sale of controllers to Marvell Technology Group Ltd. (Nasdaq: MRVL) went for roughly 2 times sales, and the Agilent sale to KKR was at 1.6 times sales, one analyst pointed out. (See QLogic Gives Up Controllers.)
But those aren't comparable businesses, PMC claimed. "You're missing the overall quality of the business versus the hard disk drive business that was sold to Marvell, for example. The margins on this business are extremely high," said Alan Krock, PMC's CFO, on the call. He added that 3.8 times sales was comparable to PMC's own multiple on the stock market -- before today's run up, that is.
PMC officials believe their gross margins will hold steady at around 70 percent after the acquisition.
— Craig Matsumoto, Senior Editor, Light Reading