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11 October 2019

Dialog’s latest buy shows continued IoT M&A depression

Creative Chips has been acquired by Dialog Semiconductor for $80mn, but the financial data paints another bleak picture for IoT valuations. With an expected revenue of $20mn, Dialog is paying just four-times the revenue for the company, which it expects to also enjoy 25% growth in the next year. This is the latest example in what appears to be an ongoing trend.

In February, connected building platform Buddy acquired smart lighting firm LIFX for $51mn, which had revenues of $25mn, giving a 2.04x multiple. In March, MSA Safety acquired worker safety technology and IIoT specialist Sierra Monitor Corporation for $33mn, or around 1.5x revenue. In April, CalAmp bought Synovia Solutions’ fleet management expertise for $50mn, which reported annual revenues of $28mn – a 1.78x multiple.

Hitachi bought JR Automation and all its robotics and IIoT knowhow for around 2.3x revenue, in a $1.42bn deal that same month. In the smart home platform game, SnapAV acquired Control4 for $680mn, meaning nearly a spot-on 2.5x revenue multiple, while in semiconductors, Infineon bought Cypress for $10bn – a 55% share price premium, but only a 4.03x revenue multiple.

In smart city traffic applications, Iteris paid just 1.3x revenue for Albeck Gerken, while Orange paid €515mn for SecureLink’s entire cybersecurity operations, or 2.07x revenue. In the smart home service provider world, Telus paid $528.4mn for ADT’s Canadian wing, which translates to 2.3x.

As you can see, these low multiples span small to large deals, and are found across the wide IoT spectrum. IBM’s $34bn acquisition of Red Hat in October 2018 seems to be the last time we spotted the classic 10x multiple, but this is IBM, which has a history of paying through the nose for companies and then writing a lot of the value off over subsequent years.

So, what’s going on here? Perhaps revenue multiples are not the best way to value these IoT companies, and admittedly, the deals that have enough data to calculate these multiples are a small fraction of the total deals taking place – meaning that perhaps the multiples are higher in these undisclosed transactions.

But we’re definitely entering a period where the early investors in IoT startups are losing patience and need to cash out. The general tone of press coverage towards the IoT as a whole has been negative for quite some time, and that will have certainly bled into the investor community. At a higher level, now is not a good time for the technology industry anyway, in terms of stumbling valuations and IPOs, and then at the macroeconomic level, 2019 has been very turbulent.

This top-level pressure might then be trickling all the way down to our corner of the world, dampening the prices paid for IoT specialists across the board. The sector does seem to have successfully reined in the ‘we can do anything’ marketing pitches, and settled down to focus on specific niches – and this move to becoming masters of a particular trade, instead of the jack-of-all, is welcome. Whether that helps raise valuations again remains to be seen, but at least the value-proposition is clearer when you have a narrower focus.

Semiconductors do somewhat buck that trend, however. There has been a sustained period of consolidation in that market, where the big firms buy smaller specialists to address gaps in their portfolios, and where multi-billion-dollar deals are not at all uncommon. For Dialog, the $80mn is small-fry compared to the likes of Infineon-Cypress, or Marvell buying NXP’s WiFi and Bluetooth assets for $1.76bn, or Nvidia’s $6.7bn purchase of Mellanox.

Dialog paid $45mn for Silicon Motion’s FCI wing back in March, looking to acquire the low-power silicon assets to flesh out its IoT offerings. In October 2017, it paid $306mn for Silego and its Configurable Mixed-signal Integrated Circuit (CMIC) portfolio, again to boost its IoT expertise, but in October 2018, Dialog sold its power management assets to Apple for $600mn, as the smartphone giant looked to bring its silicon production in-house.

With Creative Chips, the focus is now on pushing its portfolio to IIoT customers, as industrial operations begin to accommodate connected appliances and devices. Headquartered in Germany, Creative Chips is close to the likes of Bosch, Siemens, and the supporting ecosystems, which should provide a nice set of business leads for Dialog to leverage.

Dialog is hoping to become a very valuable supplier of custom-designed chips to these firms, and says that with the deal it has acquired an ‘impressive set of top-tier industrial customers that have been built over the course of nearly 20 years.’

As for the available financials, Dialog says Creative Chips is expected to generate $20mn in 2019, and post 25% revenue growth over the next few years. In addition to the $80mn cash being paid, Dialog has also floated $23mn depending on 2020 and 2021 revenue targets being met.

“The acquisition of Creative Chips is instrumental for Dialog, giving it a strong foothold in the Industrial IoT market, while still highly complementary to Dialog’s current mixed-signal business,” said Jalal Bagherli, CEO of Dialog. “The addition of Creative Chips and its team of highly experienced and talented engineers will help to further diversify Dialog’s product revenues, customer base and end markets by extending our reach in the industrial sector in addition to strengthening our automotive offering. We look forward to welcoming the whole team to Dialog.”