Farewell, InvenSense: We Hardly Knew Ye

Image source: InvenSense.

The rumors were true! Well, not that this should come as a surprise, considering the fact that InvenSense (NYSE: INVN) has been actively trying to sell itself for a couple of months now. The deal is now official, with Japan-based TDK Corporation (NASDAQOTH: TTDKY) announcing today that it would acquire the struggling sensor maker in an effort to expand its sensor portfolio.

The two companies offer highly complementary sensors. InvenSense specializes in a wide range of microelectromechanical systems (MEMS) like the gyroscopes and accelerometers that are ubiquitous in modern mobile devices, as well as microphones, inertial, and ultrasonic wave sensors, among others. TDK already offers things like temperature, pressure, and electric current sensors. Combined, the company will have better opportunities around the Internet of Things (IoT), automotive and advanced driver assistance systems (ADAS), augmented/virtual reality (AR/VR), and other burgeoning markets.

TDK will be paying $13 per share for InvenSense, representing a 20% premium from yesterday's close and slightly higher than the rumored price tag of $12 per share. That values InvenSense at $1.3 billion, a cool $1 billion less (or 43% less) than what the company's valuation peaked at in September 2014 ($2.3 billion). The deal will be funded with cash on hand, which will consume roughly half of the $2.6 billion in cash that TDK had on its balance sheet at the end of last quarter.

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InvenSense will continue to operate independently as a wholly owned subsidiary after the deal closes, which is expected in the second quarter of next fiscal year (TDK's current fiscal year ends in March 2017).

Hi, Apple

Through the acquisition, TDK will also expand its existing supplier relationship with Apple (NASDAQ: AAPL), for better or for worse. TDK already supplies things like batteries, inductive coils, and high-frequency filters, and counts on the iPhone maker for roughly 10% of sales. In contrast, Apple accounted for 58% of InvenSense's business last quarter. That heavy reliance on Cupertino is also largely why InvenSense has fallen on hard times over the past couple of years, since Apple not only squeezes suppliers but also has no compunction switching when a better one comes along.

For instance, investors were betting that InvenSense would score the Apple Watch design win, which it didn't. Not that Apple Watch has proven in hindsight to be a particularly high-volume product, but InvenSense certainly benefited from the wearable device's hype as investors presumed some exposure.

However, I wouldn't expect this acquisition to give TDK much more leverage at the negotiating iTable. Apple pretty much always calls the shots, particularly with more competitive and commoditized components. InvenSense had been differentiating itself with higher-end sensors, but Apple started adding a secondary low-power accelerometer in iPhones a couple years ago to improve battery life and efficiency, making the InvenSense component incrementally less important (although still critical for high-sensitivity tasks like motion-control games and other specialized applications).

We hardly knew ye

Since InvenSense will still operate independently and halfway across the world, there likely won't be meaningful cost-saving synergies. Indeed, the companies did not share any estimates for cost synergies. But there should be some revenue synergies given the highly complementary nature of the combined product portfolio, so there should be no shortage of cross-selling opportunities.

InvenSense went public just five years and one month ago; the acquisition marks the end of its brief public life. Relative to the IPO price of $7.50, the take-out price represents a 73% gain for investors that have been in from start to finish. That may sound impressive, but keep in mind that most investors (particularly retail investors) don't actually get in at the offer price and instead buy shares on the secondary market. Plus, the S&P 500 has gained over 80% in that time frame, so InvenSense still underperformed the broader market.

It was a wild ride while it lasted.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of InvenSense and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.