Fight for Ottawa semiconductor firm goes public

A bidding war is likely to break out for a small Ottawa semiconductor design company whose products are used by leading wireless network equipment makers.

After the board of Zarlink Semiconductor Inc. rejected another quiet takeover offer from Microsemi Corp. of Irvine, Calif., the U.S company made a public appeal Wednesday to the Canadian’s board of directors with an offer of $3.35 cents a share totalling US$445 million  – a 40 per cent premium over the share price the day before — and a challenge to put the offer before shareholders at its annual meeting meeting July 27.

“At that kind of premium why not bring it to shareholders?” Microsemi CEO Jim Patterson asked financial analysts in a conference call.

But having been rejected twice by the Zarlink board, Patterson warned that it could turn into a hostile bid. “We would prefer to proceed through friendly negotiation,” he said in a letter to the Zarlink board. “However, please know we stand ready to take all necessary actions to complete this transaction.”

In a written reply late Wednesday, the board said it “unanimously concluded with the assistance of its advisors that it significantly undervalues the company.”


“The Zarlink Board has always been prepared to consider and pursue strategic transactions or plans and will consider all appropriate alternatives which capture the true value of the company for its stakeholders” board chairman Adam Chowaniec said in the statement. “Zarlink continues to make strong progress as it focuses on growth opportunities in the communication and medical markets. Our line circuit and network timing products are winning new designs with customers and gaining market share. We have been aggressively investing to build a unique strategic position in the medical wireless market, and with our radio products now being designed in with the leading device manufacturers we are at a point of growth inflection with this segment of our business. Microsemi’s proposal clearly does not capture the value that has been created or that exists in the company.

The stock market apparently agrees: Zarlink’s (TSX:ZL) share price on Wednesday jumped to $3.56, leading one analyst to speculate that Microsemi will have to raise its bid again. On Thursday morning shares were trading at $3.60.

In an earlier bid Microsemi said it was willing to go up to $3.55.

The offer may also attract attention from other chipmakers, including Intel Corp. [Nasdaq: INTC], Qualcomm Inc. [Nasdaq: QCOM] and Silicon Laboratories Inc.

Zarlink, which had net income of US$69 million on annual revenues of US$230 million for the fiscal year that ended March 25, was created in 2001 when Mitel Corp. [Nasdaq: MITL] shed several divisions. By comparison, in its last quarter alone Microsemi had sales of US$207 million.

Today Zarlink specializes in network timing solutions that go into equipment from Cisco Systems Inc., Juniper Networks Inc., Alcatel-Lucent and others that manage time-sensitive communication applications over wireless and wired networks.

It also makes ultra low-power radios that can fit in wireless medical devices, such as Given Imaging’s PillCam, a wireless digital camera in a pill-shaped capsule, as well as implantable cardiac defribullators and pacemakers.

Microsemi designs semiconductor products for many of the same markets, which is why Patterson believes the two companies are a perfect fit.

“Medical is a focused market for Microsemi,” he told financial analysts, “and our RF (radio frequency) is one of the mainstays of our technology portfolio.”

Zarlink’s products are “extremely complimentary with our communications business today.” Their combined portfolio would span from telecommunications companies’ central offices to enterprises to homes, he added.

Patterson went out of his way to compliment his prey, particularly for its medical products. “Their engineers have done a great job,” he told analysts.

On the other hand, he said, Zarlink “have been touting very large numbers [for the wireless embedded technology] for a very long period of time, and unfortunately have not been able to execute those … Maybe they need a bigger partner to take it to the next level.”

Microsemi executives on the conference call wouldn’t say what Zarlink products or how many staff would go if the acquisition goes through.

Financial analysts on the call seemed to approve of the possible deal, calling it “great” and “makes pretty good sense.”

“Another quarter, another acquisition,” said one, a nod that in the last quarter alone Microsemi swallowed two companies. One analyst on the call figured that in the last two years Mircosemi has bought seven firms.

Things at Zarlink have been slower. After two years of losses, president and CEO Kirk Mandy turned the company into the red by shedding non-core products and layoffs. Earlier this year the board announced that chief operating officer Gary Tanner would replace him in May.

The California company’s fight for Zarlink has been quietly going on for six months, first trying fruitlessly in January to put an offer before Zarlink executives. “This approach was met with a series of delays on your end, which we accepted in good faith in pursuit of a friendly transaction,” Patterson said in a letter released Wednesday to Zarlink’s board.

In May it made a firm offer of $3 a share, which the board rejected with no reason. In June it said it was willing to go as high as $3.55. Again rejection, again no reason.

Trying to put on the squeeze, Patterson reminded the board in his letter that refusal to accept the offers “delays the ability of your shareholders to receive a substantial all-cash premium.”

The letter ends with an offer to meet with the board to negotiate a deal.


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