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What Makes Cypress a Good Acquisition Target?

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Semiconductor giants eye the Internet of Things

In the previous part of this series, we discussed how the IoT (Internet of Things) presents a strong growth opportunity for the semiconductor industry. Cypress Semiconductor (CY), with a complete embedded solution, is well-placed to tap into this growth.

As we learned in the first part of this series, the semiconductor industry has hit a slowdown with falling PC (personal computer) sales and slowing smartphone sales. According to Gartner, global semiconductor revenue fell by 2.3% YoY (year-over-year) in 2015 and is expected to fall 0.6% YoY in 2016. Amid this slowdown, the IoT, especially in the automotive space, presents a ray of hope.

Industry leaders are now shifting away from smartphones and PCs towards the IoT. In 2015, NXP Semiconductor (NXPI) acquired Freescale to become the largest automotive semiconductor company in the world.

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Companies look to grow through acquisitions

Texas Instruments (TXN) is looking to expand in the automotive space to reduce its exposure to smartphones. It is looking to grow through acquisition. According to a Bloomberg report, Texas Instruments offered to acquire rival Maxim Integrated (MXIM) but later withdrew the bid as they could not agree on a price.

Similarly, Qualcomm (QCOM) is looking to expand in the IoT and data center space after a slowdown in smartphone sales impacted its earnings. The company has adequate cash reserves for a strategic acquisition. There have been rumors of a possible acquisition of NXP Semiconductor or Xilinx (XLNX).

Even Intel (INTC) is looking to grow its IoT business. However, it has put acquisitions on the back burner until it lowers the leverage from the acquisition of Altera.

Cypress a potential acquisition target

As we discussed in the earlier parts of this series, Cypress offers a complete embedded solution, which is what semiconductor companies need to capitalize on the IoT trend. With large companies looking to grow in the IoT business through acquisitions, Cypress is a good target.

At present, it has an enterprise value of $3.8 billion. With the acquisition of Spansion and Broadcom’s (AVGO) IoT business, Cypress has increased its leverage and reduced its liquidity. We’ll look at the company’s balance sheet in the next part of this series. The SPDR S&P 500 ETF (SPY) has holdings in S&P 500 US equities. It has a 0.35% exposure to TXN and a 0.45% exposure to QCOM.

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