NEW YORK--(BUSINESS WIRE)--New York, NY - 9 November 2015
Dear Fellow Dialog Shareholders:
We are writing to you on behalf of Elliott Associates, L.P. and Elliott International, L.P. (together, "Elliott" or "we") which combined owns interests in 2.9% of the voting rights exercisable in Dialog Semiconductor PLC (XTRA: DLG) (the "Company" or "Dialog"). We have followed Dialog for a number of years and have tremendous respect for the impressive track record of substantial profit growth and shareholder value creation during that time under Jalal Bagherli and his team.
However, on 20 September 2015 Dialog announced it had entered into a binding agreement to acquire Atmel Corporation ("Atmel") for total consideration of approximately US$4.6bn (the "Transaction") - the prospect of this acquisition saw almost US$0.8bn of value wiped off of Dialog's market capitalisation on that day. We believe the Transaction's consummation has the potential to see that value destruction increase.
We intend to VOTE AGAINST this value destructive transaction at the forthcoming Dialog Shareholder meeting to be held on 19 November 2015 (the "General Meeting") and we urge our fellow Dialog Shareholders to seize this opportunity to try to reclaim that lost value by also VOTING AGAINST the resolution proposed in relation to the Transaction.
We have appointed Boudicca Proxy Consultants ("Boudicca") to help us disseminate this letter and our message to Dialog Shareholders in advance of the General Meeting - their contact details can be found at the end of this letter and at www.VoteAgainstAtmel.com.
Background to Letter
The purpose of this letter and the presentation that can be found on www.VoteAgainstAtmel.com is to detail the reasons why we believe the Transaction is a high risk, negative return endeavour which should be stopped. In summary we believe:
- the Company agreed to pay a 92% premium to fair value for an underperforming asset;
- the consummation of the Transaction will destroy approximately US$500m of value for Dialog Shareholders and expose them to excessive risk; and
- the Transaction may reduce Dialog's valuation multiple for the foreseeable future due to reduced sales growth and EBITDA margins as well as increased financial leverage and operating risk.
Since the Transaction was announced a number of parties have echoed our concerns. Equity research analysts covering the Company have expressed scepticism regarding the Transaction, its strategic merits and financial benefits as illustrated by the quotes below:
- "We believe Dialog's move to acquire Atmel for $4.6bn is the wrong deal at the wrong price. Dialog's desperation to reduce its dependency risk with Apple (79% of sales) has ultimately led the company to enter an auction process and over-pay for a tier-3 microcontroller company that has a huge employee base (Atmel 5,100 vs Dialog at 1,500). We believe the claimed benefits of combining power management and microcontrollers to "win" in IoT are also over-stated"(1)
- "DLG paid a steep premium...and a rather high pre-synergy multiple, EV/adj EBIT 2016 of 17.6x, which we attribute to bidding competition". "The move is a big fish to swallow from a deal multiple, financial and integration point of view"(2)
- "Atmel has particular challenges (multi-year restructuring, competitive pressures from larger rivals), which makes the 40% bid premium a curious one". "Bringing in 5,000 new employees introduces a lot of operational integration risk and we think product synergies are probably not seen until 2018+"(3)
Additionally, leading independent proxy advisory firms Institutional Shareholder Services and Glass Lewis have both recommended that Dialog Shareholders VOTE AGAINST the Transaction and stated:
- "The company [Dialog] appears to be paying more than a full price to take this step [a transformational transaction to diversify its client and product base], as evident in the price paid for Atmel, which is not being compensated by expected synergies."(4)
- "...the proposed purchase price appears on the high side in our review of precedent transactions, falling well above the mean and median multiples of EBITDA and net income paid in similar industry transactions." "Overall, we believe Dialog has an attractive stand-alone growth story and we do not believe the board has presented a sufficiently compelling case that the proposed transaction, at this valuation, is in the best interests of shareholders."(5)
We believe that Dialog has implicitly acknowledged the scepticism surrounding the Transaction by amending the approval requirement such that only a simple majority of Dialog Shareholders voting at the General Meeting is required to approve the Transaction. This is considerably less than the 75% threshold envisaged when the acquisition was first announced and suggests that Dialog deliberately altered the Transaction structure to reduce the level of shareholder support required to get the deal done.
We strongly believe that any acquisition must have a solid strategic rationale, be value creative for Dialog Shareholders and that the level of value creation should be carefully weighed against the associated risks. We outline in further detail below why we believe this deal falls considerably short against these criteria and that it is in Dialog Shareholders' best interests to VOTE AGAINST the Transaction.
A 92% Premium to Fair Value for an Underperforming Asset
We believe Dialog agreed to pay one of the highest control premiums seen in the semiconductor industry since the beginning of 2012 - the mean premium over that period was 33%. The offer value of $10.42 per Atmel share implied a 2016 P/E of 24x - which is a 77% premium to Atmel's 10-K Peers (6) the day prior to the Transaction being announced. Atmel has historically traded at a discount to its 10-K Peers implying that the premium paid is even higher - as high as 92%. A high premium may be justified if an acquisition leads to synergies which exceed that premium however, we do not believe that is the case for this Transaction as we detail in the next section.
Additionally, high premia are sometimes paid for companies that experience high growth rates - Atmel is not one of those companies. Its earnings per share ("EPS") have declined by almost 60% over the last three financial years and although they are forecast by analysts to stabilise over the next two years Atmel has consistently underperformed analysts' earnings expectations - with annual EPS estimates 12 months in advance being on average 83% higher than the final result for the last three financial years. Atmel's disappointing historical financial performance has led to its share price underperforming the broader semiconductor industry and its 10-K Peers over all relevant time periods.(7)
Ending 5th May, 2015
|Total Annualised ShareholderReturn:
|Average 10-K Peer
Atmel Annualised TSR Relative to:
|Average 10-K Peers
Quite simply we do not believe that Atmel's standalone performance or the financial and strategic benefits of the deal justify such a significant premium.
Approximately US$500m of Value Destruction for Dialog Shareholders
Elliott believes that Dialog agreed to pay approximately a US$1.9bn premium to Atmel shareholders and in return is receiving synergies worth US$1.4bn (using management's estimate of $150m of annual synergies) - implying almost US$500m of value destruction to Dialog Shareholders, before transaction costs. This represents 12% of Dialog's market capitalisation prior to the announcement of the Transaction, however, on the day the Transaction was announced the Company's market capitalisation declined by 19% or approximately US$0.8bn.
Elliott believes this is due to a combination of factors including investors being sceptical regarding the level of synergies forecast by the Company as well as a valuation multiple de-rating due to the increased risk profile of the combined company (see next section). We think Dialog Shareholders are right to be concerned about these issues.
Dialog and Atmel have little product or customer overlap and different routes to market for their main products. It is therefore unclear to us where all of the Company's estimated US$150m of genuine cost synergies emanate from and management is yet to communicate a sufficiently detailed and credible plan.
For illustrative purposes if the realised synergies were 25% lower than expected this would lead to approximately an additional US$200m of value destruction for Dialog Shareholders.
Increased Risk Profile for Dialog Shareholders
We believe the Transaction exposes Dialog Shareholders to unacceptable levels of risk - especially when weighed against the absence of value creation. The risks Elliott sees in this acquisition are twofold: (i) excessive financial leverage; and (ii) a large complex integration process.
Dialog currently has an unleveraged balance sheet, with approximately US$470m of net cash as at 2 October 2015. Pro forma for the Transaction the Company has guided it will have net debt / LTM EBITDA of 3x - one of the highest leverage multiples in the sector. Whilst we view the Company's existing capital structure as inefficient - becoming one of the most levered companies in the sector whilst still having a high level of customer concentration is risky and could compound all the other problems with the Transaction.
The reasons underlying our scepticism regarding the potential synergies in this acquisition also lead us to worry about the potential disruptive effects of integrating two very different businesses. Not only is there limited customer, product and distribution channel overlap, Dialog is a fabless company with only approximately 1,400 employees whereas Atmel operates a fab and employs over 5,200 people. These characteristics would make integration risky for an acquisition of any size - let alone one which more than doubles the revenues of the Company.
Until the Company has paid down a significant portion of its acquisition debt, Atmel has been successfully integrated and synergies realised we would expect Dialog to trade at a discount to its historical P/E multiple. Since the Transaction was announced we have already seen evidence to that effect.
Mediocre Strategic Rationale
It appears to us that the main rationale for the Transaction is to diversify the Company's revenue base rather than to meaningfully improve its competitive positioning with customers. Whilst we are supportive of a strategy of diversification we feel that the financial benefits of a transaction of this nature must be clear to be justifiable. Any control premium paid must be significantly outweighed by the financial benefits of the transaction - or a Dialog Shareholder would be better off buying shares in the target and paying no control premium. The Transaction does not meet these criteria.
Dilutive to Top Line Growth and Pre-Synergy EBITDA Margins
Dialog is a high sales growth, high EBITDA margin company and its valuation has reflected that. Atmel on the other hand has had negative to marginally positive historical growth rates and one of the lowest EBITDA margins in its 10-K Peer group. The table below shows the sales growth and EBITDA margin dilution Dialog would have experienced over the last three years if Atmel had been part of the Company.
|Annual Sales Growth:
|Pro Forma Dialog
|Pro Forma Dialog
We would expect this dilution to weigh on the valuation multiple of Dialog shares for the foreseeable future, further compounding the already lacklustre financial returns of this acquisition.
There are Superior Uses of Capital than the Transaction
We believe that the Company has excess capital on its balance sheet which should be used to generate value for shareholders. Should the Transaction not be consummated Elliott recommends that Dialog establish a committee of the board to examine all capital allocation options open to the Company.
Value creative transactions which fulfil the Company's strategic aims would be our preference - however, if Dialog cannot find attractive acquisition targets at appropriate prices then the alternative is to return capital to its shareholders - not to pursue overpriced transactions.
The Transaction is expected to be accretive to underlying EPS in 2017 with analysts estimating approximately 10% accretion. We believe a return of capital could be 20% accretive whilst retaining a more moderate level of leverage (1x) and without exposing Dialog Shareholders to undue risk. For illustrative purposes taking Dialog's leverage up to 3x, in line with the Transaction, could increase EPS by almost 60% if the Company pursued a share buyback.
The Transaction requires the approval of the simple majority of Dialog Shareholders voting at the General Meeting - historical turnouts at Dialog general meetings have been as low as 30% over the last five years - your vote will make a difference.
By now you should have received a notice of the General Meeting of Dialog (the "Notice"). You will find enclosed with the Notice, a reply form (the "Reply Form"). Elliott urges you to complete the Reply Form to VOTE AGAINST the resolution and send it to address provided by the Company as soon as possible but in any event no later than 12 noon GMT on 17 November 2015.
What to do if you have already submitted a Reply Form and wish to change your mind and vote against the resolution?
If you have already submitted a Reply Form to vote for the resolution but have changed your mind, you are able to revoke that form and vote against the resolution. In this case, you will need to contact Martina Zawadzki by email at firstname.lastname@example.org and request a fresh Reply Form. You should then complete this form and then address a letter to Dialog stating that you revoke your previous Reply Form and that the enclosed Reply Form is submitted in its place. This letter and the completed fresh Reply Form should be sent to:
Dialog Semiconductor Plc
c/o Art of Conference - Martina Zawadzki
Böblinger Str. 26
Fax +49 (0) 711 4709-713
We hope we have demonstrated why we believe the Transaction is not in the best interest of Dialog Shareholders and that the best course of action for the Company is for Dialog Shareholders to VOTE AGAINST this acquisition.
Elliott Management Corporation
(1) Deutsche Bank Dialog equity research (22-Sep-15) (2) Commerzbank Dialog equity research (21-Sep-15) (3) Stifel Dialog equity research (19-Oct-15) (4) Institutional Shareholder Services Special Situations Research (30-Oct-15) (consent has not been granted for the use of this quote) (5) Glass Lewis Proxy Paper (6-Nov-15) (6) Atmel 10-K peers comprise: Synaptics Inc., NXP Semiconductors NV, Microchip Technology Inc., Silicon Laboratories Inc., Samsung Electronics Co Ltd., Intel Corp., Freescale Semiconductor Ltd., Texas Instruments Inc., ON Semiconductor Corp., STMicroelectronics NV, Renesas Electronics Corp., Infineon Technologies AG and Cypress Semiconductor Corp. (7) 5 Years total annualised shareholder return for Average 10-K Peers excludes Freescale Semiconductor and NXP Semiconductors given they were private companies during this period. 4 Years total excludes Freescale Semiconductor for the same reason.
|Boudicca Proxy Consultants
|Elliott Management Corporation
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About Elliott Management Corporation
Elliott Management Corporation manages two multi-strategy hedge funds which combined have more than US$27 billion of assets under management as at 1 October 2015. Its flagship fund, Elliott Associates, L.P., was founded in 1977, making it one of the oldest hedge funds under continuous management. The Elliott funds' investors include pension plans, sovereign wealth funds, endowments, foundations, funds-of-funds, high net worth individuals and families, and employees of the firm.
Disclosure of Potential Conflicts of Interest
Elliott intends to vote its interests in the Company held at the record date for the General Meeting, being 12.00 noon GMT (1.00 p.m. (CET)) on 17 November 2015, against the proposed resolution.
Elliott is neither affiliated with Dialog nor Atmel. However, as at the date of this document, Elliott holds a long position in Dialog against which it has short positions in a number of related semiconductor companies (including Atmel) and a semiconductor index.
Elliott acquired interests in the securities of the Company based on its belief that such securities, when purchased, were undervalued and represented an attractive investment opportunity. Depending upon overall market conditions, other investment opportunities available to Elliott, and the availability of securities of the Company at prices that would make the purchase or sale of such securities desirable, Elliott may seek to increase or decrease its long position in the Company. The foregoing sentences apply mutatis mutandis to Elliott's aforementioned short positions.
This document sets out the views of Elliott Management Corporation, Elliott Associates, L.P. and Elliott International, L.P. (collectively, "Elliott") and their respective affiliates, concerning the proposed acquisition of Atmel Corporation by Dialog Semiconductor plc ("Dialog") (the "Transaction").
This document does not constitute a financial promotion of any kind by Elliott or any affiliate, and the receipt of this document in no way renders you a client of Elliott or any affiliate. The information contained in this document should not be construed as investment or tax advice, nor should it be construed as an invitation to purchase or sell any of your shares or CIs in Dialog. If you are in any doubt as to the action you should take, you should seek advice from an appropriately qualified independent financial or other adviser.
The information contained in this document (which may include price or other data) is for illustrative purposes only and may not be comprehensive or up to date. In preparing this document, Elliott has relied upon and assumed, without independent verification, the accuracy, reliability and completeness of all information available from public sources. No responsibility is accepted and no representations, undertakings or warranties are made or given, in either case expressly or impliedly, by Elliott or any affiliate as to the reliability, accuracy, timeliness, completeness or fitness for a particular purpose of information contained in this document or as to the reasonableness of any assumptions on which any of the same is based. Additionally, neither Elliott nor any affiliate accepts any direct or consequential liability for any errors in or reliance upon the contents of this document. Neither Elliott nor any affiliate will be responsible for updating any information contained within this document and opinions and information contained herein are subject to change without notice. Certain figures included in this document have been subject to rounding adjustments.
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Document title: Elliott DLG Letter (PDF Download)