M&A Alert—January 12, 2012

Mindspeed Acquires Picochip

Author:

Target:

Buyer:

Transaction Size: $77mm

Transaction Overview

On January 5^th 2012, Mindspeed Technologies (NASDAQ: MSPD, market cap: $189mm), agreed to acquire Picochip for up to $77mm.

Target Description

Picochip develops system on a chip (SoC) silicon powering femtocells.  Femtocells are micro-cellular base stations which can be deployed in a home, office or metropolitan setting.  Femtocells allow wireless operators to improve cellular reception in weak signal areas as well as offload voice and data traffic from their primary network in areas where congestion is an issue.  Picochip sells its products to network equipment OEMs who then in turn sell the complete equipment to wireless network operators.  Picochip claims a greater than 70% share of the 3G HSPA femtocell market. Picochip products are deployed in 50 mobile network operators such as Vodafone, ATT, T-Mobile, Rogers, China Mobile, TeliaSonera and SingTel.  Customers include Cisco, Alcatel-Lucent, Samsung, Femtel, ip.access and MitraStar.  Founded in 1997, Picochip has 150 employees and is headquartered in Bath, the U.K.  Competitors include Ubiquisys, ip.access, Airwalk and Airvana.  Picochip has raised $121mm in funding from Atlas Venture (Christopher Spray), Highland Capital Partners (Daniel Rosen, Matthew Nichols, Sean Dalton), Intel Capital (Abdul Guefor), Pond Venture Partners (Jamie Urquhart, Richard Irving), Samsung Ventures (Brian Kang), ATT, Scottish Equity Partners (Stuart Paterson) and ETV Capital.

Buyer Description

Mindspeed develops semiconductors which are integrated into wireline and wireless network infrastructure.  Mindspeed offers three product families:  1) Communications convergence processing (low-power, multi-core digital signal processor system-on-chip (SoC) solutions for fixed and mobile (3G/4G) carrier infrastructure),  2) high-performance analog (high-density crosspoint switches, optical drivers, equalization and signal-conditioning solutions to coordinate complex switching, timing and synchronization in next-generation optical networking) and 3) wide area networking communications (to optimize circuit-switched networks that are the foundation to the Internet’s  long-distance infrastructure).  In February 2011, Mindspeed announced Transcede, the first small cell SoC baseband processor for LTE networks, which has been adopted by 22 companies.  Mindspeed’s customers include major telecommunication equipment vendors such as Alcatel-Lucent, Cisco, Huawei, Hitachi, Ericsson, Mitsubishi, Nokia Siemens Networks and ZTE.

Transaction Parameters

Mindspeed will pay $27.5mm in cash (financed with debt) and $24.3mm in stock (Mindspeed will issue 5.19mm of stock which equals 15% of Mindspeed’s outstanding shares).  In addition, Mindspeed will pay  up to $25mm, payable in cash or stock in the first quarter of CY2013 contingent upon revenue delivery of above $25mm in CY2012.  Picocell’s CY2011 revenue was $15mm.  Mindspeed believes Picochip products can grow 50%-60% in CY2012, a growth that is consistent with external market research for the small cell base station market for the same period.  The transaction is expected to close in the first quarter of CY2012 and will be accretive to earnings in the second half of CY2012.

Enterprise Value (EV):                                                                      $52-$77mm
EV/CY’11 Revenue Multiple:                                                                 3.5x-5.1x

Other comparable transactions include:

1) Nvidia’s acquisition of Icera for $367mm (4.0 times revenues) in May 2011
2) RadiSys’ acquisition of Continuous Computing for $112mm (2.0 times revenues) in May 2011
3) Qualcomm’s acquisition of Atheros for $3.1b (3.5 times revenues) in January 2011
4) Broadcom’s acquisition of Beceem Communications for $316mm (4.0 times revenues) in October 2010
5) Intel’s acquisition of Infineon’s wireless unit for $1.4b (1.1 times revenues) in August 2010
6) Renesas’ acquisition of Nokia’s baseband technology for $200mm in July 2010

Strategic Rationale

Picochip brings Mindspeed a strong market position, customer base and expertise addressing the key flavors of 3G femtocell technology complementing Mindspeed’s LTE (4G) capabilities.  Although LTE represents an attractive market long-term market, according to ABI Research, 3G (WCDMA/HSPA) will still account for up to 70% of the total markets for small cells through 2016, emphasizing the importance of 3G solutions, in spite of the inevitable upgrade to LTE over time.  Integrating both standards into multi-core processors is also expected to enable the growth of carrier-grade small cell base stations.  Small cell base station shipments are expected to grow to 24mm units by 2016, which translates to a 98% CAGR from CY2011-CY2016 according to ABI Research.

Architect Partners’ Observations

As GigaOM nicely illustrated, small cells/femtocells are one of the key solutions for wireless carriers to effectively manage the dramatic increase of data traffic on their networks.  In addition, small cells potentially represent a new revenue stream for wireless carriers.  At times, the wireless carrier sells the femtocell to its customers and has the opportunity to provide the internet service connection which is the connection point for the femtocell base station.

The small cell/femtocell market has been big on promise for quite some time but has been slow to develop commercially.  As is evedenced by Picochip’s $121mm in capital raised since inception, it’s also been an expensive endeavor to develop the technology and market the products.

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