Why Germany's Infineon Is Buying Cypress Semiconductor

After a multiyear transformation from a seller of a commoditized product to a specialized manufacturer of connectivity chips, it looks like investors will be saying goodbye to Cypress Semiconductor (NASDAQ: CY). Germany's Infineon (NASDAQOTH: IFNNY) on Monday said it will buy Cypress for 9.0 billion euros (or $10.1 billion as of this writing). It's been a bumpy ride, but Cypress shareholders get to cash in at a good time.

What investors get from Infineon

Infineon's proposed tie-up values Cypress nearly 50% higher than the stock price prior to media reports that a deal was in the works. It works out to $23.85 per share, to be paid out in cash to Cypress shareholders. The amount is also (maybe coincidentally?) very close to the stock's all-time high reached back in early 2011 -- when touchscreens for smartphones, tablets, and computers were all the rage. Remember life without touchscreens? Thanks, Cypress!

Infineon expects it will close the transaction near the end of 2019 or early in 2020, pending regulatory approval. Along the way, owners of Cypress will continue to receive dividend payments of $0.11 per share each quarter, good for a current annual yield of 2%. With nearly half of its revenue derived from Asia, this should also end the tumultuous ride Cypress stock has been on due to the U.S.-China trade war.

Why the premium pricing?

Infineon's reasons for scooping up Cypress are diverse. The company cited increasing its presence in Silicon Valley (Cypress is based in San Jose, California) as well as strengthening its revenue makeup in key markets like Japan. The German-based technology outfit also said it expects 180 million euros ($201 million) in annual cost savings by 2022 and 1.5 billion euros ($1.7 billion) in synergy over the long term. Cypress only did $2.48 billion in revenue and $509 million in adjusted net profit in 2018, so the estimates may seem generous.

But that brings us to the real reason for the takeover interest. Cypress' connectivity business has been growing by double digits over the last couple of years, with its automotive business taking the lead. Sure, Infineon gets to combine its own power management chip products with those of Cypress, but this deal is really about the future. Cypress is dedicating 85% of its research and development dollars -- which totaled $364 million last year, or 15% of revenue -- to connection and computing technology for the auto industry and the Internet of Things (IoT).

As demand for electric vehicles, car connectivity to the internet, and autonomous driving technology continues to rise, Cypress is primed to benefit. It expects its auto business to grow 8% to 12% a year through 2023. During that time frame, management says its revenue-per-car-sale will double to around $180. Cypress is at the heart of several companies' vehicle electrification and autonomy efforts. But this connected technology isn't limited to the auto industry. IoT sales are also forecast to increase by 12% to 14% each year through 2023.

As it is heavily involved in the important German auto market, it's clear what Infineon is after, and Cypress Semiconductor fits the bill. With trade negotiations breaking down between the U.S. and China, tricky times lie ahead for the chip industry. The hefty premium placed on Cypress stock seems like good timing for shareholders to cash out, even if revenue stands to grow in the next few years.

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Nicholas Rossolillo and his clients own shares of Cypress Semiconductor. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.