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Infineon Cleans Up, Making It a Consolidator or Acquisition Target

{complink 2565|Infineon Technologies AG} is on a roll. It has jettisoned unprofitable units, narrowed operations to less volatile industry segments, sales and margins are surging, debts are negligible, and for the first time in 10 years, dividend payments are on the table again.

Quite naturally, investors are taking a second look at the German semiconductor manufacturer. On Tuesday, Nov. 16, the Munich-based company's stock price shot up to a new 52-week high of $8.63 after it posted stronger than expected sales and profits for the fiscal fourth quarter and year ended Sept. 30. News the company would be paying dividends for the first time since 2000 further boosted its market value above $9.3 billion.

What's next for Infineon? In my opinion, the company stands to benefit from continuing consolidation in the semiconductor market, although the management — after enduring years of reorganization and spinoff or sale of business units — may not be too keen on making acquisitions. Instead, the management may instead prefer to focus on their recent gains and consolidate market positions in areas where the company believes it has a better competitive position.

There are other potential developments from Infineon's newly developed financial strength. While there are no current suitors on the horizon, Infineon is certainly a much better acquisition target than it looked even one year ago. Sales for fiscal 2010 rose to €4,585, including contributions from the wireless solutions unit the company has agreed to sell to {complink 2657|Intel Corp.}, from €3,027 in fiscal 2009. Gross profit margins for the year, excluding the wireless business, increased to 37.5 percent from 22.8 percent.

What's the secret to Infineon's sudden growth spurt? As CEO Peter Bauer puts it:

    We have consistently geared the corporate portfolio to businesses that are less volatile and more profitable. In providing products and solutions addressing the megatrends in society — energy efficiency, mobility and security — we are focusing on markets enabling long-term, above-average growth.

It's been a painful journey. The company suffered earlier this decade from exposure to the price-sensitive and highly volatile memory market. Despite numerous attempts, it failed to engineer either the turnaround or successful sale of Qimonda AG, the DRAM division spun off as part of plans to relieve the company of the heavy losses racked up by the unit.

Infineon's extensive reorganization efforts culminated earlier this year in its decision to sell the wireless solutions business to Intel. Although it was one of the company's major business units, Infineon executives chose to exit the wireless IC business because they lacked the scale to compete against bigger players and, additionally, planned to devote resources to less volatile businesses.

The moves are finally paying off. Infineon is today a more narrowly focused business. Its operations are now limited to automotive, industrial and multimarket, and chip card and security sectors, all areas where it has strong market share and deep relationships with OEM customers. All these market segments also require less capital investment, freeing up scarce resources for R&D as well as selling and marketing activities.

Another reason for optimism about Infineon is that it is spinning off a healthy stream of cash and has limited debt leverage, putting it in a position to finance any future acquisitions from available resources. With €1.7 billion in cash and cash equivalents at the end of its latest quarter and less than €300 million in long-term debts — down from almost €1 billion only two fiscal years back, Infineon's financial health has become clearly stable, giving it a better profile with investors.

By paying its first dividends since fiscal 2000, Infineon is signaling quite strongly the past stumbles are well behind it. That makes Infineon a potential acquisition for a bigger competitor interested in flexing its muscles in the automotive, multimarket, and security semiconductor markets. Is there such a player on the horizon?

5 comments on “Infineon Cleans Up, Making It a Consolidator or Acquisition Target

  1. Anna Young
    November 17, 2010

    Bolaji, I just read a report expressing concerns “about a return to profligacy” at Infineon from Standard & Poor's Equity analyst James Crawshaw. The analyst likes the company's performance but thinks the management seems ready to return to its old ways. Here are excerpts from the report:

    “While we think Infineon has left plenty of upside potential in its fiscal year 2011 guidance and, having jettisoned DRAM and Wireless, is a less risky business than in the past, we are concerned that with EUR2 bln of cash burning a hole in management's pocket a return to profligacy could see history repeat itself. Management is already guiding for a capex hike of 70% in fiscal year 2011 in addition to potential acquisitions.”

    Do you see Infineon using its current cash for acquisition and what do you expect of the management now that the company is in much better shape?

  2. SP
    November 17, 2010

    It would be interesting to see who acquires Infineon.

  3. bolaji ojo
    November 18, 2010

    Infineon's recent history is still too fresh and too raw for the company to forget the trauma of the last several years. I appreciate James Crawshaw's concern but I suspect Infineon's management is not going to be throwing cash all over the place anytime soon. Their likely strategy would be targeted acquisitions in specific product areas to shore up their portfolio. A large acquisition that would necessitate their borrowing from banks or the equity market is unlikely in my opinion.

  4. bolaji ojo
    November 18, 2010

    SP, Infineon might be a potential acquisition target but I don't see this happening right now. Infineon is still a big company by revenue and capitalization, which means a buyer would have to dig deep to fund the purchase. Few companies in the semiconductor world today has that kind of cash or is able to raise what would be required to buy Infineon.

    There are several possibilities, however. A private equity group could orchestrate a leverage buyout of Infineon, similar to deals done with fellow European NXP (former Philips Semiconductor) and Freescale Semiconductor. A more exciting possibility could be for Advanced Technology Investment Co. of Abu Dhabi to make a bid for Infineon, further establishing it as a catalyst and formidable player in the sector. Could this happen? I can't say but the German shareholders in Infineon as well as concerns about Europe's fading clout in the semiconductor market could make this a difficult or near-impossible deal.

  5. SP
    November 18, 2010

    Thanks Bolaji for clarifying. If its for sale and in case ATIC buys it, I am sure it would be a big news in the semiconductor industry with Abu Dhabi being central point in discussion.

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