Synaptics Inc. (SYNA) has signed an agreement to acquire Conexant Systems LLC, an audio and voice processing company, and the multimedia business of Marvell Technology Group (MRVL), which is also a provider of audio and video processing technologies.
The total addressable market is expected to increase 38% to $10.3 billion by 2020. Synaptics is aiming to complete its human interface portfolio with audio and video solutions as voice recognition is a key for home automation, and video processing capabilities can help the company with automotive sector growth.
These acquisitions will also help Synaptics tap into the IoT market, which is expected to be the next growth generator for the company. The CEO has already made his intentions clear about the expansion in the IoT market during a recent conference. Synaptics also narrowed its guidance resulting in a downward revision to its midpoint guidance; the company now expects revenue to be in the range of $420 million to $450 million during the fourth quarter. The stock was down 1.46% on Monday, but it bounced back above $60 in after-hours trading.
Transaction details
For Conexant’s acquisition, Synaptics is paying $300 million in cash along with around 726,000 shares of the company’s common stock. This puts the valuation at around a price-sales (P/S) of 3.3 as compared to Synaptics’ P/S of 1.24. Conexant generated $104 million in revenue during the year ended 2016.
Synaptics agreed to pay around $95 million, all cash, for the multimedia business of Marvell Technology Group. Multimedia business’ revenue of $94 million puts the P/S multiple around 1.01, which is comparatively cheaper than Synaptics.
Potential benefits
The acquisitions will enhance the product portfolio, and Synaptics can act as a one-stop provider for human interface solutions for home automation and in-car services. Having voice capabilities in the portfolio puts Synaptics directly in the home automation market. The company’s display drivers and fingerprint solutions also come as a natural addition for home automation.
Note that the total voice recognition market is expected to reach $127.5 billion by 2024, according to Grand View Research. According to Mckinsey Research,
“With technological advances in voice control and artificial intelligence, the intelligent assistant is now a viable control center for the connected home.”
The intelligent virtual assistant (IVA) market is set to reach $12.28 billion by 2024 fueled by a CAGR of 38% in speech recognition during 2016-2024. Conexant Technologies’ acquisition is really a key in that arena. Conexant has more than 480 patents and is one of the leading providers of far-field voice solutions. The company has shipped more than 27 million units. Note that Amazon (NASDAQ: AMZN) partnered with Conexant in the recent past to integrate Alexa into voice chips, indicating that Conexant has wide acceptance in the industry when it comes to far-fields voice solutions. All in all, Conexant’s acquisition opens new growth opportunities for Synaptics, especially in voice assistance and smart homes market.
Marvell’s multimedia business also complements Synaptics’ smart home, smart car and IoT product portfolio. With Marvell's audio and video processing technologies, the company is exposed to the growth of OTT, streaming media devices and digital personal assistant markets.
These acquisitions will also help Synaptics in the car infotainment human interface market. Research firm IHS notes that speech recognition, virtual assistance and natural language interfaces will grow to become a standard in the automotive market during the next five years.
Further, the management of Synaptics believes these acquisitions will result in margin boost, tier-one customer addition and diverse IP.
Final thoughts
Synaptics is still undervalued, given very low valuation multiples. Narrowing of guidance doesn’t warrant a price decline as the company is exposed to several growth areas including fingerprint, integrated display and touch drivers and, now, the IoT including smart homes market. Margin is also expected to go up. Therefore, despite the top line guidance trim, Synaptics will probably exceed its bottom line guidance. Given cheap valuation and exposure to several growth markets, Synaptics remains a buy.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
