Cadence Design Systems To Acquire AWR For RF EDA Software Tech – Cadence Design Systems, Inc. (NASDAQ:CDNS) No ratings yet.

Quick Take

Cadence Design Systems (CDNS) announced it has agreed to acquire AWR Corporation from National Instruments (NATI) for $160 million.

AWR operates as high-frequency radio frequency [RF] EDA software technology company.

CDNS is acquiring AWR to integrate its design software into several of its platforms, but the stock may be fully valued at its current level, so my bias is NEUTRAL.

Target Company

El Segundo, California-based AWR was founded in 1994 to develop high-frequency RF EDA software solutions for use in the communications, aerospace and defense, semiconductor, computer, and consumer electronics industries.

Management is headed by General Manager Joseph E. Pekarek.

AWR’s primary offerings include:

Investors have invested at least $13.8 million in the company and include Intel Capital, CMEA Capital, CMEA Ventures, Synopsys, and Southern Ute, among others. Source: Crunchbase

Market & Competition

According to a market research report by Grand VIew Research, the global RF components market was valued at over $18 billion in 2018 and is projected to surpass $45 billion by 2025.

This represents a forecast a strong CAGR of 14% between 2019 and 2025.

The main drivers for this expected growth are high demand for devices with internet connectivity, such as smartphones, tablets, drones, and smart home devices, among others.

The Asia-Pacific region is projected to grow at the fastest rate during the period due to the increasing adoption of improved connectivity solutions and growing number of Internet users in the region.

Major vendors that provide RF components include:

  • Broadcom (AVGO)

  • Fujitsu (TYO:6702)

  • International Quantum Epitaxy (LON:IQE)

  • NXP Semiconductors (NXPI)

  • Renesas Electronics (TYO:6723)

  • Murata Manufacturing (TYO:6981)

  • Taiwan Semiconductor Manufacturing (TPE:2330)

  • Texas Instruments (TXN)

  • TDK Corporation (TYO:6762)

Source: Sentieo

Acquisition Terms and Financial

Cadence disclosed the acquisition price and terms as $160 million in cash due at closing.

Management didn’t provide a change in financial guidance as a result of the proposed transaction.

A review of the firm’s most recent published financial results indicate that as of September 28, 2019, CDNS had $655.2 million in cash and $1.2 billion in total liabilities, of which $345.8 million was long-term debt.

Free cash flow for the nine months ended September 28, 2019, was $522.8 million, so Cadence can close the deal without financial hardship.

In the past 12 months, CDNS’s stock price has risen 57.4% vs. the U.S. Software industry’s growth of 33.3% and the overall U.S. Market’s rise of 18.6%, as the chart and corporate events graphic indicates below:

Source: Simply Wall Street

Earnings surprises versus analyst consensus estimates have been positive in eleven of the last twelve quarters, as the chart shows below:

Source: Seeking Alpha

Analyst sentiment in recent earnings calls has been significantly lower than in 2018, as the linguistic analysis shows here:

Source: Sentieo

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure

Amount

Market Capitalization

$18,850,000,000

Enterprise Value

$18,660,000,000

Price / Sales

7.96

Enterprise Value / Sales

8.09

Enterprise Value / EBITDA

29.61

Earnings Per Share

$1.52

Total Debt To Equity

31.35%

Free Cash Flow [TTM]

$536,430,000

Revenue Growth Rate

11.44%

Source: Company Financials

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming the above general DCF parameters, the firm’s shares would be valued at approximately $34.07 versus the current price of $67.18, indicating the stock is currently potentially overvalued, with the given assumptions of the DCF.

Commentary

CDNS is acquiring AWR for its high frequency RF EDA software and related expertise.

As Dr. Anirudh Devgan, president of Cadence stated in the deal announcement,

The addition of AWR’s talent and technologies will enable us to provide more integrated and optimized RF design solutions, thereby further accelerating system innovation as we execute our Intelligent System Design strategy.

As high growth potential 5G technology deployments begin on a global basis, CDNS appears to be positioning itself to help customers create differentiated products while reducing time cycles through the design process.

Furthermore, the AWR system will integrate directly with the Cadence Allegro PCB Designer and its Virtuoso and Spectre platformed for RF IC design.

It appears that CDNS wants to provide its customers with a greater degree of design process integration, reducing vendors and obtaining a larger share of wallet in the bargain.

We don’t know what multiple CDNS paid for AWR; perhaps it was primarily a ‘team and technology’ basis deal.

While the deal appears smart on a strategic basis, CDNS’ stock may be another story.

Very generous DCF assumptions still result in a picture of a stock that may be overvalued at its present level, especially when compared to Synopsys (SNPS).

My current bias on Cadence is NEUTRAL.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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