M&A of CML Micros

ystems PLC

Presented by
Qianyi GAN
Fangming WANG
Xiang ZHANG
(Team Blingbling)
1

Target company overview

Manufactures and markets a range of semiconductors for glo
bal industrial, professional and consumer applications within t
he wireless communications, storage and wireline communic
ations market areas.
Founded in 1968, 7 officies, 179 employees
Traded on London Stock Exchange
Group revenues grew almost 8% to 25.24m (2012: 23.41
m)
Profit before tax rose 28% to 5.07m (2012: 3.95m)
Both main semiconductor market sectors posted solid revenu
e gains
Focussed product strategy is proving effective

*Figures extracted from CML Microsystem Plc annual report of 2013

Executive summary and transact

ion rationales
The whole semiconductor is on the rise according to ABI research.
As quoted from KPMG industry report: the increasing costs of developing advanced prod
uction capabilities and application market shifts are likely to be among the factors promptin
g higher M&A activity within the global semiconductor industry.
This acquisition delivers a significant premium and attractive value to CMLs shareholders.
The stock price is now undervalued according to the relatively conservative DCF analysis
we did, and the company has a great intensive to keep growing in the coming years. Organ
ic growth will impede its development in this industry, while acquisition by an industry leade
r can enhance future performance.
CML has already extended its services and offices into several parts of the world and while
the size of its cap can still be explored.
The technology and innovation can be absorbed and made better use of, which will bring hi
gher profitability.

CMLs SWOT analysis

Strengths :
-wide ranging design skills
-diversified technology portfolio
-extensive selling network
-reduced labor costs
-experienced technology teams

Weaknesses :
-highly dependence on foreign
markets leads to exposure to
risks of changing local
regulations and circumstances
-customer concentration

Company-Based
Opportunities :
-high technical barriers of market entry
-fewer competitors and in industrial segment
for semiconductor products
-increasing demand for semiconductor
products of BRIC countries
-robust professional and commercial wireless
communication markets

Threats :
-Continuing global
economic uncertainty
-Changes in buying
patterns of key
customers can have a
huge adverse effect to
the company

Market-Based
*Sources for SWOT analysis are listed on the reference page

Valuation summary & conclusion

s
This acquisition will be valued at both DCF method. T
his is a way of valuing a project, company, or asset us
ing the concept of the time value of money.
In our conclusion, equity value in DCF analysis is abo
ut million and the price per share is about 6 pound, gi
ven the number of shares outstanding is 15 millions.
The acquisition price, if no premium is offered, will be
around 100 million pound. This fairly low price is very
favourable considering the companies technology and
innovation value.

Summary of comparable acquisi

tion analysis
We choose 3 acquired public semiconductor companies th
at have similar lines of business with CML for rough comp
arable company analysis.
Elpida Memory acquired by Micron Technology in 2013
Sanyo Semiconductor acquired by On Semiconductor in 2011
Volterra Semiconductor Corporation acquired by Maxim in 2013

CML is operating in a better condition than the three comparable

s, with bigger profit-earning ability and growth potential. Its enter
prise value is much lower than the other three.

Summary of comparable quoted

companies analysis
Comparable Universe:
CML Microsys

CSR pc

P/B

400.76

P/E

0.18

ROA

10.74%

ROE

21.93%

Oxford

Imagination

Wolfson

Optos

Average

Among its comparable companies, CML

microsystems has a relatively small company
size, revenue, net income. But its performance
cannot be underestimated when multiples are
being reviewed. The ROA and ROE are above
the industry average. It also has a stronger
resistance against market downturn

*Ratios are calculated from the data of CML annual report

Summary of DCF analysis

CAPM
13.95%

Cost of Debt
1.5%+libor

Risk Free Rate

10-Bond return
2.8%

Beta
0.81

Market Return
FTSE annual
return
16.7%

Estimated WACC is about 13.18%

EBIT*(1-tax)
plus
depreciation
Amortization
less Change
in Capex

less Change
in WC
FCFF

2,009
-15,989

2,010
16,901

2,011
2,420,231

2,012
2,895,186

2,013
4,091,669

436,901
4,182,658

660,488
3,750,089

321,579
3,276,015

213,394
2,944,039

241,546
2,517,374

-66,306

-49,065

-253,035

-145,077

-179,448

38,264

9,199

31,665

9,039

450

-132,333
4,763,945

-183,122
4,650,466

-926,184
7,165,379

-492,187
6,680,844

-163,686
7,193,273

* Financials are all from the annual report of 2009 to 2013

Result
Enterpri
se value

102,807,555

Net debt

338,267

Equity value

21,365,892

Price per
share

6.47

Market Cap

92 m

Detailed methodology and sourc

es used
Methodologies:
Comparable acquisition analysis
Comparable quoted company analysis
DCF analysis

Sources:
Google finance
Yahoo finance
Wikipedia
Valuation for mergers, buyouts, and restructuring Enrique R.Arz
ac
Valuation, leveraged buyouts, and mergers & acquisitions Joshu
a Rosenblum, Joshua pearl

Back up materials for comparabl

e acquisition analysis: multiples
Comparable Universe:
Elpida Memory acquired by Micron Technology in 2013
Sanyo Semiconductor acquired by On Semiconductor in 2011
Volterra Semiconductor Corporation acquired by Maxim in 201
3

Average Multiples of Sanyo Semiconductor and Volterra:

Acquisition Price/EBIT: 22.65
Acquisition Premium: 14.75%

Back up materials for comparabl

e acquisition analysis: base data
Company
Name

Enterprise
Value
(in million
dollars)

Acquisition
Price(in million
dollars)

Acquisition
Price/EBIT

Acquisition
Premium
Over EV

Elpida Memory

593

250

9.3x

-57.8%

Sanyo
Semiconductor

496

600

19.4x

20.9%

Volterra

557

605

25.9x

8.6%

CML,Inc:
Enterprise Value: 92 million, EBIT: 5 million
Thus, by multiple of Price/EBIT, the estimated takeover price of CML is
5*22.65=113.25 million; by average premium over Enterprise Value, the price
should be 105.57million.
*Figures are found Google Finance, Yahoo Finance and
http://investing.einnews.com/news/semiconductor-sector-mergers-takeovers

acquisition analysis: market overvi

ew

Extracted from E&Y Global Technology M&A report

Back up materials for comparable listed company

analysis: multiples
Oxford Imagination

Wolfson

Optos Average

CML Microsys

CSR pc

Operating
Margin

22.27%

5.00%

8.95%

6.41%

-8.68%

4.17%

6.35%

Profit Margin

18.53%

-4.82%

6.93%

-1.75%

-9.15%

4.05%

2.30%

Current Ratio

3.63

2.29

1.86

2.27

3.69

1.34

2.51

P/B

400.76

199.43

567

245.23

121.5

120.25

275.70

P/E

0.18

12.85

0.19

0.21

25.2

8.71

7.89

ROA

10.74%

3.19%

6.29%

2.57%

-5.86%

1.85%

3.13%

ROE

21.93%

-7.00%

17.96%

-1.53%

-12.40%

5.24%

4.03%

Book/Share

1.44

3.85

2.48

0.73

1.07

1.74

1.89

VaR

-2.04

-3.27

-3.13

-3.93

-2.25

-6.22

-3.47

The companies listed above are under the same sector in the FTSE list as CML (semiconductor).
*Multiples are provided by the http://www.macroaxis.com/

Back up materials for comparable listed company

analysis: base data
(Million)

CML
Microsys CSR pc

Imaginatio
Oxford
n Wolfson

Averag
e
Optos

Revenue

25.84 M

960.71 M

346.3 M

165.34 M

179.44 M

158.2 M

Gross Profit
Working
Capital
Market
Capitalization
Current
Liabilities
Shares
Outstanding

18 M

495 M

156 M

131 M

76 M

89 M

305.97
160.83

12 M

283 M

89 M

50 M

109 M

30 M

95.50

92.31 M

1.26 B

797.2 M

460.1 M

151.51 M

150.92 M

330.41

4M

218 M

104 M

40 M

22 M

87 M

79.17

15.92 M

163.48 M

56.7 M

265.8 M

116.77 M

72.21 M

115.15

CFO
Retained
Earnings

7.72 M

82.31 M

33 M

(59.28 M) (12.88 M)

(19.2 M)

5.28

17 M

26 M

79 M

64 M

60 M

3M

EBITDA

6.01 M

88.89 M

45.5 M

17.81 M

(5.46 M)

15 M

4.72 M (46.33 M)

24 M

(2.9 M) (16.42 M)

6.4 M

Net Income
Total Debt
Earnings Per
Share

338.27 K

728 K

24.7 M

29.91 M

N/A

63.3 M

41.50
27.96
-5.09
39.30

0.29

0.52

0.42

0.02

N/A

0.09

0.27

*Data are provided by the http://www.macroaxis.com/

Back up materials for DCF analy

sis:
Main assumption
Cash flow discounted discounted at the weighted average cost of capita
l to calculate firm value
The current adjusted growth rate in the last 3 years is sustainable. We a
re using the a relatively conservative estimation between 2011-2013.
Inflation rate are being considered using the past 5 years data, since th
at of 2013 is reaching a historially low, we are taking the mean from 200
9.

Terminal value part:

Terminal value: based on measure of the performance of the business i
n terminal year of projection & we set the growth rate at 6.5%
Estimation was made until 2018. Still, the DCF methods will inevitably c
ontains assumptions and errors.

Back up materials for DCF analysis:

Turnover
Gross Profit
Operating
Profit

EBIT*(1-tax)
plus
depreciation
Amortization
less Change in
Capex
less Change in
WC
FCFF
Inflation rate
2013
1.90%
2012
2.83%
2011
4.48%
2010
3.29%
2009
2.10%

2,009
16,088,959
10,201,932

2,010
18,023,139
12,489,762

2,011
22,121,646
15,367,532

2,012
23,409,402
16,212,816

2,013
25,237,939
17,564,087

-20,000

21,140

3,027,289

3,621,375

5,117,967

2,009

2,010

2,011

2,012

2,013

-15,989

16,901

2,420,231

2,895,186

4,091,669

436,901

660,488

321,579

213,394

241,546

4,182,658

3,750,089

3,276,015

2,944,039

2,517,374

-66,306

-49,065

-253,035

-145,077

-179,448

38,264

9,199

31,665

9,039

450

-132,333

-183,122

-926,184

-492,187

-163,686

4,763,945

4,650,466

7,165,379

6,680,844

7,193,273

Average
inflation rate:
3.1%

The growth rate

is calculated
using the CAGR
rate of Turnover
between 20112013. We are
excluding the
data of 09-10,
assuming that
the growth rate
is too high to be
sustainable.

Inflation is taken into account when computing g. The rate for

UK in 2013 is 1.9%, and 2.83% for 2012 according to
http://www.bankofengland.co.uk/publications/Pages/inflationrep
ort/infrep.aspx

*All financials are from CML annual reports of 2009 to 2013

Back up materials for DCF analysi

s:
Equity in 2013

21,365,892

Debt in 2013

338,267

beta for CML

0.810

risk free rate

2.77%

cost of debt

1.5%+libor=2.4%

Market return

16.70%

source:http://www.macroaxis.com/invest/alphaSearch/CML.
L
source:http://www.bloomberg.com/markets/ratesbonds/government-bonds/uk/
source:http://www.global-rates.com/interestrates/libor/libor.aspx
http://stockmarketalmanac.co.uk/2013/12/2013-marketreview-annual-performance

CAPM

14.05%

=Rf+beta*(Rm-Rf)

WACC

13.86%

Tax rate: 20%

2,013
Forecas
ted
FCFF

2014

2,015

Debt/Equity

2,016

2,017

2,018

7,193,273 7,660,947 8,159,028 8,689,491 9,254,443 9,856,125

Discoun
ted by

WACC 7,193,273 6,722,884 6,283,255 5,872,375 5,488,363 5,129,463

Sum of
PV(FCF
Price/shar
102,807,5
F)
6
55
e

1.58%

terminal
value

140,865,521

73,311,214

Terminal value is
calculated by the
formula: FCFFn
* (1+g)/ (r-g)

References:
http://finance.yahoo.com/news/worldwide-total-semiconductor-market-grow-140600709.ht
ml
http://www.cmlmicroplc.com/en/financial_information/reports.aspx
http://www.pwc.com/en_GX/gx/technology/publications/assets/pwc-faster-greener-smarter
.pdf
http://www.noodls.com/view/DE63F4717BAEB47415235678790A494349D208AF?3360xx
x1384850767
http://investing.einnews.com/news/semiconductor-sector-mergers-takeovers
http://www.stockopedia.com/content/chris-gurry-managing-director-of-semiconductor-play
er-cml-microsystems-plc-speaks-to-stockopedia-news-43303/
http://www.ey.com/Publication/vwLUAssets/EY-Global_technology_M_and_A_update-Q31
3_highlights/$FILE/EY-Global_technology_M&A_update-Q313_highlights.pdf
https://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/kpmg-20
13-global-semiconductor-survey.pdf