Architect Partners LLC

M&A Alert: Intel Acquisition of Wind River

Transaction Overview

Today Intel announced an agreement to acquire Wind River.  Wind River provides operating system and supporting software products for embedded computing applications.  The embedded computing market encompasses hundreds of thousands of products from automotive sensors to airplane electronics to medical devices to dishwashers.  Wind River has clients across a broad array of industries including aerospace and defense, automotive, consumer, medical, industrial and communications.  Wind River is most well know historically for their VxWorks real time operating systems (RTOS) which is something equivalent to the Windows operating system of the embedded world.  In recent years, Wind River began to play defense against the open source threat by introducing their own version of Linux operating system optimized for embedded computing applications.

Architect Partners Observations

This is a watershed transaction.  Intel's move signals a very material shift in its strategy as well as shines a bright light on the very large opportunity for embedded computing.

This move strongly signals Intel's view that the growth opportunities in markets such as mobile phones are crucial to its future.  This is a marked shift from its historical focus on PC's, laptops and servers.  The embedded market is one where the semiconductor chips are closely tuned for the device and application and tight integration with the operating system is essential.  Ownership of Wind River will allow Intel to provide a bundled and closely integrated solution to its embedded clients.  Don't be surprised if this forces the hand of other semiconductor vendors to attempt to establish similar in house capability.  We also would not be surprised to see another bidder comes out of the woodwork.  In fact, the stock price closed today above Intel's offer, suggesting that investors feel the same way.

Transaction Parameters

Enterprise Value:                                                                                $786mm
Offer Premium to Previous Day Stock Price:                                                44%

Valuation Multiples:
    Enterprise Value / LTM Revenue                                                             2.2x
    Enterprise Value / LTM EBITDA                                                              21.7x
    Price / LTM Earnings                                                                            82.3x

M&A: Harris Acquisition of M/A-COM

Transaction Overview

Last week Harris announced that it has agreed to purchase the M/A-COM subsidiary of Tyco Electronics.  M/A-COM provides a broad set of product and services to support wireless communications within the public safety and public service, federal government, transit and transportation, and utilities sectors.  Products include network systems and software solutions; mobile and portable radio equipment; broadband WiMAX products for high speed-data applications; and operations, service and maintenance.  The purchase price is $675 million in cash structured as an asset purchase. The goodwill arising on completion of the acquisition will be an allowable tax expense with an estimated net present value of $60 million, resulting in an effective purchase price of $615 million.

Valuation

Effective Purchase Price:                                                                    $615 mm
M/A-COM LTM Financial Statistics (Sept 2008):
    Revenue                                                                                         $463 mm
    EBITDA                                                                                             86 mm

Valuation Multiples:
    Price / Revenue                                                                                   1.3 x
    Price / EBITDA                                                                                    7.2 x

Architect Partners Observations

While this would certainly be classified as a mature company acquisition, we believe it does highlight some important principals to keep in mind for sellers of all stripes, of course adapted for individual circumstance:

1. Consolidation-driven M&A will continue to show strength as companies seek to either strengthen core businesses or divest themselves of non-core businesses.
2. Financial metrics matter.  In this case, M/A-COM has growing revenues with solid profitability which is expected to be accretive to Harris within the current fiscal year.  Few, if any acquirers, are interested in anything but near-term financially accretive acquisitions in this environment.
3. While economic uncertainty and buyer valuation discipline is certainly evident, valuations achieved are not particularly low for high quality assets.