Semiconductor M&As: Who's Next?

In a report published Thursday, FBR analyst Christopher Rolland noted that if the pace of consolidation seen within the semiconductor sector continues this year, 32 percent of all U.S. publicly traded companies in the space will be acquired.

Rolland said that while such a run-rate is not sustainable, he is nevertheless expecting above-average rates of consolidation for the remainder of the year.

According to Rolland's analysis of eight recent deals, acquirers eliminated more than 10 percent of expenses for large acquisitions and almost 20 percent for smaller acquisitions. In addition, of the 57 semiconductor companies examined, the average company offers its acquirers 51 percent higher earnings per share after the elimination of "redundant" costs (5 percent of COGS, 10 percent R&D and 40 percent SG&A). Finally, the study also showed that acquirers who made use of debt financing at 3 percent can realize an average return on investment of 6.3 percent after incorporating synergies.

Top 3 Takeout Candidates

Rolland continued that Atmel Corporation ATML (Outperform rated, $10 price target) is his top candidate to be acquired. The company has an "excellent" MCU product portfolio with two architectures and is less R&D inventive.

Atmel also has one of the oldest and most efficient fabs globally, which offers a potential acquirer "excellent" gross margin accretion for firms with modern manufacturing capacity.

Lattice Semiconductor LSCC (Outperform rated, $8 price target) is Rolland's second-most likely takeover candidate as it is ranked in the top third of financially accretive companies with 59 percent higher earnings per share, once synergies are realized.

Lattice also offers acquirers an "incredibly high" 11 percent return on investment after financing interest. From a non-financial perspective, the company offers a full range of display technologies, USB 3.1 options and a level of programmability or hardware acceleration for processor offerings.

Finally, Cavium Inc CAVM (Outperform rated, $80 price target) is Rolland's third-most likely takeover candidate given its "highly strategic" products for a large computer and/or networking acquirer.

The analyst further suggested Cavium's product line would be extremely valuable for Hewlett-Packard Company HPQ while QUALCOMM, Inc. QCOM could "jump start" its ambitions to become a player in ARM-based servers through an acquisition.