Infineon (IFNNY) to Buy International Rectifier (IRF) - Analyst Blog

German chipmaker Infineon Technologies AG (IFNNY) recently entered into a definitive agreement to acquire International Rectifier Corp. (IRF), a manufacturer of power management semiconductors, for $3 billion in an all cash deal. The deal, which is the German chip maker's largest to date, will be funded by cash and $2 billion (1.5 billion-euro) in debt financing.

Per the terms of the deal, Infineon will acquire the U.S. firm for $40 a share, which represents a fully diluted enterprise value of roughly $2.4 billion and a 51% premium over Tuesday's closing share price.

It is worth noting that shares of Infineon fell nearly 2% following the announcement. On the other hand, shares of International Rectifier soared 47.2% to $39.10 yesterday, close to Infineon's offer of $40 per share.

The boards of both companies have approved the deal, which is most likely to close late this year or early next year after regulatory approval and customary closing conditions.

International Rectifier Corporation, an El Segundo, CA-based company, manufactures power-efficient electrical components for devices including satellites, cars, aircrafts and lighting systems.

Therefore, its product line is a perfect complement to Infineon's existing power management business. The acquisition will also help Infineon expand to important international markets, particularly North America and Asia.

International Rectifier has been streamlining operations, which helped it swing to a profit in fiscal year 2014 (ended in June). Infineon's scale and capacity may enable better distribution of IRF products and also enable further cost cutting at IRF. Therefore, the acquisition should be immediately accretive to Infineon's earnings. Moreover, Infineon expects International Rectifier's margin contribution to be at least in line with its average-cycle margin target of 15%.

For International Rectifier shareholders, this is an attractive return on their investment. It is worth mentioning that the pace of mergers and acquisitions in the Semiconductor industry has picked up of late. Some of the recent deals include Intel Corp.'s (INTC) announcement to acquire the Axxia chip business from Avago Technologies Ltd. (AVGO) for $650 million and Applied Materials, Inc.'s agreement to acquire Tokyo Electron Ltd.

Infineon manufactures chips for industrial electronics and the automotive industry and provides complete systems solutions. In the recently-concluded third quarter of fiscal 2014, the company reported earnings of €0.13, which was up 18% sequentially and 86% year over year. In dollar terms, earnings came in at 18 cents per share.

Revenue for the quarter increased 6% sequentially and 9% year over year to $1.5 billion (1.1 billion-euro). The company's exited the quarter with cash and cash equivalents of $394.0 million (291 million-euro).

Both Infineon Technologies and International Rectifier currently have a Zacks Rank #2 (Buy).

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