Microsemi Buys White Electronic Designs for More Military Firepower

Microsemi (MSCC), which develops analog mixed-signal semiconductors, gets roughly 39% of its revenues from the military and security sectors.

This will get larger with the company's latest deal: The $100 million purchase of chipmaker White Electronic Designs Corporation (WEDC). Microsemi plans to use its cash-on-hand to finance the deal.

The acquisition is the latest in the semiconductor M&A spree. Last week, Intersil (ISIL) agreed to pay $370 million for Techwell (TWLL), which makes chips for video.

The industry's environment is ideal for dealmaking. A variety of semiconductor companies have large amounts of cash as well as growing market caps. Moreover, growth is making a comeback across the globe.

Urgent Military Need

Over the past couple of years, WEDC has restructured its operations, which has included selling various assets. Now the chipmaker is focused primarily on areas where it has deep technical knowledge and manufacturing capabilities. The main sectors include aircraft, missiles and ordnance and Net-centric operations.

Essentially, WEDC develops chips that allow for multiple applications, such as combining with military-grade GPS (global positioning system) receivers. This meets an urgent need in the Afghan war, where it's critical for precision-guided munitions. Resulting accuracy has improved, with the munitions' perimeter of likely error decreasing from 136 meters of the target to 10 meters. It's a huge step forward that will likely reduce collateral damage.

Furthermore, with anti-tamper technology, it's easier to prevent chip-level attacks and intellectual property theft. Ultimately, this aids the sale of military technologies. So WEDC's systems are likely to have a broad application across Microsemi's portfolio.

Logic in the Deal

In the latest quarterly report, WEDC posted a 17% increase in net sales, to $15.6 million, and income from continuing operations of $0.01 per share. This is despite downward pressure from the company's unloading of its electromechanical business in Fort Wayne, Ind.

Yet, WEDC's restructuring does have a problem. The revenue base is lower, which makes it difficult to absorb its fixed costs. Bear in mind research and development expenditures can be steep.

So it makes sense for WEDC to find a larger partner, such as Microsemi. The deal looks like it will generate substantial cost synergies. For the 2011 fiscal year, the transaction is expected to be accretive to earnings by $0.08 to $0.12 per share.