Street Check: Benchmark predicted Sigma Designs could be bought by Silicon Labs

Shares of Sigma Designs (SIGM) jumped in morning trading after Silicon Laboratories (SLAB) agreed to acquire the company for about $282M. The deal comes after Sigma reported weaker than expected quarterly results, and several months after an analyst speculated about a potential deal. BACKGROUND: In a June 7 note, Benchmark analyst Gary Mobley speculated that Sigma Designs could be a "prime acquisition target" for Silicon Labs or MaxLinear (MXL) if it shed assets to become a pure play IoT chip/cloud infrastructure. Mobley said if Sigma was not acquired, but was able to raise $100M by selling non-core, non-IoT businesses, Sigma could make additional acquisitions to strengthen its IoT focus. ACQUISITION ANNOUNCEMENT: After the market close on Thursday, Silicon Labs announced that it will buy Sigma Designs for $282M, or $7.05 per share in a cash transaction. The deal, which is subject to certain closing conditions, is expected to close in the first calendar quarter of 2018. Key to the deal is Sigma's Z-Wave IoT technology for smart home solutions, and Silicon Labs CEO Tyson Tuttle commented that "By adding Z-Wave technology to Silicon Labs' connectivity portfolio, we will be better positioned to serve this fast-growing market." Silicon Labs intends to work in collaboration with the Z-Wave Alliance to drive adoption and development of Z-Wave technology, it said. In the event the closing conditions are not met, Sigma said it will sell its Z-Wave business to Silicon Labs for $240M. In addition, Sigma said it plans to divest or wind down its Smart TV business, and is in active discussions with prospective buyers to divest its Media Connectivity business. Separately, Sigma Designs reported a third quarter loss per share of (25c) on revenue of $33.9M, missing analysts' consensus estimates of (15c) and $38.55, respectively. WHAT'S NOTABLE: In July, Sigma Designs said it had engaged Deutsche Bank as a financial advisor to explore strategic alternatives, including continuing with its restructuring plans, selling or spinning off certain products or the sale of the company. In October, the company announced major restructuring activities to streamline the Connected Smart TV Platforms business and accelerate a return to profitability. As a result, Sigma said it planned to cut 200-250 jobs. REACTION: Weighing in on the acquisition announcement, Benchmark's Mobley downgraded Sigma Designs this morning to Hold from Buy, telling investors that the 26% takeover premium from Silicon Labs is a good deal for shareholders. Sigma shares were also downgraded to Hold from Buy at Craig-Hallum and Lake Street. Craig-Hallum's Richard Shannon called the deal a "disappointing outcome," as he thought the sum of the parts would be closer to $9 per share. He does not see a better price, as he thinks the deal was "well-shopped." Lake Street's Jaeson Schmidt said he is "not surprised" by the news following Sigma's exploration of strategic alternatives. He sees little risk to getting the deal done. PRICE ACTION: Sigma Designs is up nearly 23% in morning trading to $6.88, while Silicon Laboratories is up about 0.33% to $90.50. OTHERS TO WATCH: MaxLinear, a company that had been rumored to be a potential suitor for Sigma, is up 1.5% to $25.37.

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