ON Semiconductor (ON 20.44, -0.12, -0.58%) and Quantenna
Communications (QTNA 24.03, +3.53, +17.22%) announced last night after the bell
that the two parties have entered into a definitive agreement for ON
Semiconductor to acquire Quantenna for $24.50 per share in an all cash
transaction which is expected to close in the second half of 2019.
Recall that QTNA went public nearly two and a half years ago in October 2016. QTNA competes in the same spaces as tech giants Broadcom (AVGO 299.85, +3.88, +1.31%), Marvell (MRVL 19.72, -0.10, -0.50%), and Qualcomm (QCOM 56.97, +0.06, +0.11%), but at 25.6x forward P/E at last night’s close, the stock traded at bit on the high side compared to MRVL’s 21.2x, QCOM’s 15.0x, and AVGO’s 12.5x P/E multiples.
The deal is especially interesting for ON because it allows the company to enter the Wi-Fi technology market and expand its software portfolio and also provides entry into the automotive and industrial low-power connectivity markets.
To be sure, Quantenna garnered a decent 19.5% premium to last night’s close, but some on the Street were expecting, if QTNA was acquired at all, that the company could have fetched a more robust value; the acquisition consideration represents equity value of approximately $1.07 bln and enterprise value of approximately $936 mln, after accounting for Quantenna’s net cash of approximately $136 mln at the end of fourth quarter of 2018.
Still, ON sees strategic significance validating the deal in the near term. Management stated that, following consummation, the transaction is expected to be immediately accretive to ON Semiconductor’s non-GAAP earnings per share and free cash flow, excluding any non-recurring acquisition related charges, the fair value step-up inventory amortization, and amortization of acquired intangibles.
What’s more, the timing of the deal makes sense given the litany of devices requiring Wi-Fi technology in the recent tech climate. The industry is set to certify a new Wi-Fi standard, called Wi-Fi 6, in 3Q2019. As a reference, back when the 11ac standard was introduced, QTNA was a small, relatively unknown company. Since then, it has grown in size and reputation and now is regularly invited to compete on just about every major service provider high-performance design. As such, QTNA is expecting many more opportunities to win designs in Wi-Fi 6 than in any prior generation.
The deal is likely to close in a timely fashion as the two companies don’t compete in any direct markets. It makes sense for ON to expand into the Wi-Fi sector because, frankly, there are a lot of devices on the market today that use the technology. The deal was likely in the works for some time before last night’s announcement, allowing the stock to close the gap on the agreed price in recent weeks. We’d point out that QTNA’s stock had moved more than 40% higher as of last night’s close since the start of 2019 vs the 12.4% advance in the S&P 500 during that time.
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