Investors Lose Confidence As Infineon Pays $10 Billion To Acquire Cypress Semiconductors

Infineon Cypress Merger
Ploss, CEO of German semiconductor manufacturer Infineon poses before the company's annual news conference (Photo: Reuters / Michael Dalder)

To expand its next-generation internet and automotive technologies business, Infineon has announced that it will be buying Cypress Semiconductor for $10 billion. The German-based semiconductor manufacturer hopes to increase its portfolio with the acquisition of the California-based tech company. Unfortunately, investors are apparently not completely on board with the idea.

Following news of the acquisition, share prices for Europe's largest chipmaker plunged by as much as 9 percent this week. Investors reportedly did not agree on the price Infineon was willing to pay, citing that it was too much given the current state of the chip business.

Investors also didn't like the fact that 30 percent of the acquisition cost would be funded through equity, with the rest paid in debt and cash.

The investment was apparently not a good move given the geopolitical situation worsened by the escalating trade war between the United States and China. Infineon recently lowered its revenue guidance citing a slowed demand from China amid trade frictions.

Meanwhile, Cypress' share price jumped by as much as 27 percent shortly after the deal was made public. Despite the increase, Cypress stock prices were still well below what Infineon was willing to pay for it. Market analysts have stated that the overall risk-reward profile of the acquisition has been unfavorable to investors, despite the potential synergies.

Infineon is betting on the deal for it to cash in on its substantial automotive technology market share, which will stand at around 13 percent after the acquisition. Infineon would combine its expertise in managing electric drivetrains with Cypress' class-leading connectivity technologies.

The deal, which is currently the largest takeover by a European company this year, will essentially make Infineon the eighth largest chipmaker in the world.

With the merger, Infineon would be able to offer a much more comprehensive package to electric-powered vehicle manufacturers. This would, in turn, grow its market share in the automotive industry, especially as global government clam down or fossil fuel-powered vehicle production and distribution.

The acquisition involved a cash offer of $23.85 per share, which is a staggering 46 percent premium on Cypress current share prices. Infineon CEO Reinhard Ploss even described the acquisition amount as a "proud price" without a doubt. Ploss defended the high price as an acceptable offer for the companies given the possible synergies that it would generate.

Infineon's Chief  Marketing Officer Helmut Gassel revealed in an interview that discussions to acquire the company actually started five weeks ago. The acquisition was then accelerated after a third-party company expressed its interest in Cypress.

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