Skyworks Could Pursue More M&A Despite PMC-Sierra Cancellation, CLSA Says

• Skyworks Solutions Inc SWKS shares have been on a downward trajectory over the past six months, and have lost 26 percent since May 26.
• CLSA’s Srini Pajjuri maintained an Outperform rating on the company, with a price target of $92.
• The termination of the merger agreement with PMC-Sierra Inc PMCS is positive, since it did not make strategic sense, Pajjuri believes.

Skyworks announced that it has terminated the merger agreement with PMC-Sierra. “We consider this a positive development given our view that PMC is not a good strategic fit,” analyst Srini Pajjuri wrote.

While the PMC-Sierra deal would have helped diversification and resulted in an estimated EPS accretion of up to $0.75, the company’s growth has significantly lagged that of its peers over the past three years due to legacy telecom headwinds and execution issues.

Pajjuri believes that the application-specific nature of PMC-Sierra’s products would have restricted Skyworks’ opportunity to target niche storage and telecom markets. “Moreover, there weren’t many customer, R&D, or manufacturing synergies.” The analyst added that even a “well-regarded Skyworks management” may have found it tough to achieve a turnaround at PMC-Sierra.

While Skyworks should be able to sustain double-digit organic growth for the next 2-3 years, backed by secular RF content tailwinds, management may seek another acquisition target to achieve diversification.

Analog or MCU companies offer a better strategic fit “given Skyworks’ focus on IoT, its module capability, and the larger addressable markets,” Pajjuri noted. He added that the companies that fit this profile include Silicon Labs, Semtech, Monolithic Power and MaxLinear, while companies like Inphi, IDT and Mellanox are potential options in case Skyworks’ wishes to stick to the telecom/data center theme.

“We reiterate our O-PF rating as we believe that the stock can work with or without an acquisition,” Pajjuri commented.