Dialog to Buy Atmel

Dialog Semiconductor plc fell the most in almost seven years in Frankfurt trading after agreeing to buy Atmel Corp. for about $4.6 billion -- more than its own market value -- to expand into the automotive industry and everyday objects that are increasingly connected to the Internet.

The cash-and-share offer for San Jose, California-based Atmel, a maker of chips used in industrial machinery and cars, values the target at $10.42 a share, or 43 percent more than the stock’s last closing price. Strategic buyers on average paid a premium of 19 percent in comparable chip-industry transactions in the past 12 months, according to data compiled by Bloomberg.

“The deal leads to a massive dilution to existing Dialog shareholders,” said Thomas Becker, an analyst at Commerzbank AG, who cut his rating on the stock to "hold" from "buy." “While we see the positive implications in the long term, there will be a lot of integration work in the next two to three years, and that’s not without risks."

Reading, England-based Dialog, which supplies chips used in Apple Inc.’s iPhone and iPad, is seeking to move on after a plan to combine with Austria’s AMS AG to create a European specialist in smartphone chips fell apart last year. Chief Executive Officer Jalal Bagherli said Dialog had to compete with other bidders to win Atmel, a deal that would add complementary products for the automotive industry and so-called Internet of things to create a company with $2.7 billion in annual revenue.

Dialog shares fell as much as 16 percent, the steepest decline since November 2008. They traded 15 percent lower at 38.67 euros as of 9:36 a.m. in Frankfurt, giving the company a market value of 3 billion euros ($3.4 billion).

Both companies’ boards support the deal, which is expected to be completed in the first quarter of 2016, subject to regulatory and shareholders approval. Atmel said last month it was considering strategic options, and China Electronics Corp. was said to have held preliminary talks to acquire Atmel.

“We passed the computing era, we’re at the height of the mobile era, and we’re about to enter the IOT era,” Bagherli, who’ll lead the enlarged company, said in a phone interview. “Companies are trying to position themselves.”

The takeover extends a record year for semiconductor deals, as chipmakers combine to counter slowing growth and increasing costs. Intel Corp. agreed to buy Altera Corp. for $16.7 billion in June to defend its presence in data centers. Dutch chipmaker NXP Semiconductors NV agreed to acquire Freescale Semiconductor Ltd. for about $11.8 billion in cash and stock in March to cut costs and expand in chips for cars.

Semiconductor deals are also surging as chipmakers add technology used in connecting homes, cars and appliances to the Internet. Atmel’s major clients include Arrow Electronics Inc., Samsung Electronics Co. and Avnet Inc., according to data compiled by Bloomberg.

Apple is by far Dialog’s largest customer. The takeover of Atmel will help the chipmaker decrease its reliance on the mobile-phone industry, Bagherli said. After the deal Dialog will get about 45 percent of its revenue from businesses aimed at the sensor market, up from 5 percent to 10 percent, he said.

Atmel investors will receive $4.65 in cash and 0.112 of a Dialog American depository share for each stock. Dialog plans to finance the purchase with a combination of existing cash, $2.1 billion in new debt and 49 million American depository shares, or about 38 percent of the enlarged company’s issued share capital.

Shares of Atmel have fallen 13 percent in New York trading this year, underperforming the Philadelphia Stock Exchange Semiconductor Index, which has lost 11 percent. Dialog had surged 55 percent through last week.

The takeover will probably boost Dialog’s underlying earnings starting in 2017 and allow the company to save $150 million within two years, the chipmaker said.

Morgan Stanley advised Dialog, while Davis Polk & Wardwell LLP and Reynolds Porter Chamberlain LLP provided legal assistance. Qatalyst Partners worked with Atmel, while Jones Day was legal adviser.

--With assistance from Rainer Buergin in Berlin and Kim McLaughlin in Stockholm.