Broker says recent Intel share sale could make Imagination a targetWith investors still concerned about Greece, global economic growth and US interest rate rises, markets have started the week on a nervous note.But chip designer Imagination Technologies is bucking the trend, up 6.8p or 3% to 226p after analysts at Liberum tipped it as a possible bid target.We previously didn’t see Imagination as an acquisition target due to its prior shareholder structure (Intel, Apple key shareholders). However, given Intel’s sell down, the consolidation in the semiconductor sector and Imagination’s material discount to its peer group we believe it could now be a target. We see EDA [electronic design automation] companies such as Synopsys and Cadence, or IP companies such as Rambus as potential acquirers. There would be scope for material cost savings given the customer overlap and ability to close Pure [radio business].EDA companies are increasingly venturing into the IP space. Cadence bought Tensilica in 2013 for an enterprise value of $350m or 8 times EV/Sales to boost its intellectual property offering. Synopsys bought Virage Logic/Arc in 2010 for $289m or 6 times EV/Sales (business was loss making). Synopsys recently signed a deal with Broadcom for its Arc IP. Rambus is also changing its business model as it moves from a litigator to an IP licensor. We note that Rambus has $318m of cash and an acquisition of Imagination would speed up its transition into an IP company. Apple is still Imagination’s third largest shareholder. We don’t believe Apple would have an issue with Imagination becoming part of any of the three companies above as it would be part of a better resourced company. There is also a chance that Apple itself could decide to bid for Imagination as it is increasing its internal R&D capability and its mobile OS is very tied to Imagination’s graphics IP given its use of the Metal API. Intel and Apple were previously Imagination’s largest and third largest shareholders, respectively. Having industry shareholders made a take-over more complex as both companies were there to ensure Imagination’s independence and to get access to its technology. Now that Intel has sold down its stake we believe a potential acquisition would be easier. Continue reading...
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