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Why did MaxLinear go all out to buy Exar?

MaxLinear deals seem to be shrouded in mystery – how and why did it take over the creator of MoCA Entropic, why then would it take over an Entropic rival in the G.hn division of Marvell, and finally what happened this week when it threw $700 million at buying out Exar.

The truth is there is no mystery except why it took Exar so long since its formation in 1970 to reach the position it occupies today – a low revenue on a hugely rising margin, with much of its income coming from China, and many of these coming from deals with unnamed tier 1 agencies.

Sometime in early 2016 the management at Exar seemed to have a brainwave, or more of a “saleswave.” They found that making products speculatively for a wide market made their R&D diffuse, and their sales effort scattergun, so they approached Chinese Tier 1 players among operators, automotive and enterprises and instead challenged themselves to respond rapidly to whatever chips they were asked to make.

To prepare for this Exar wanted a cash mountain, and so sold and leased back its HQ ($24 million) and sold off its displays business Integrated Memory Logic (IML) to Beijing E-Town Chipone, a consortium of Chinese IC designers ($136 million) in the process amassing $224 million in cash and short term assets. IML made power management and controllers for LCD displays.

It also decided to head for China, and move its operations there. Already its revenues are 70% in Asia, 18% in the Americas and just 12% in Europe with a gross margin of just 51.8%, modest for a chip maker.

What it has done is start a series of new component areas, with take in automotive Advanced driver assistance systems (ADAS) and in Vehicle Entertainment components, and chips which manage power inside cars and which can do the same for base stations and it has added video processing chips. The process in each case is to find a Chinese tier 1 player and build the chips directly for their use, in high volumes. These new areas of business although low in volume, at $27 million last quarter, are huge in margin at something approaching 75%. It is currently halfway between its overall 51% margin to this 75%. MaxLinear’s margin is closer to 59%.

Exar has played in the automotive after-market space for many years but it only makes up 3% of total business, selling bluetooth audio systems, infotainment, off road vehicles, black box systems and automotive diagnostic equipment. But now it has this new sales approach MaxLinear is hoping that its own skills in making CMOS radio chips which acts as tuners to any number of parallel signals, in TVs, cable DOCSIS, MoCA and soon G.hn, that it will find willing customers in China, using the same sales approach.

It has borrowed $425 million to do this deal and clearly some of those banks had to be told which Tier 1 accounts it has already won, and how spectacularly its revenues are about to increase. It told the investment market at its financial results meeting in far less detail.

Exar has just qualified for the AEC-Q100 stress test for car components which was established to allow common part-qualification and quality-system standards for in-car electronics. Another area it is now in are power management for a Tier 1 teleconferencing systems and also for point of sale systems.

The company also has another unnamed Tier 1 customer for video surveillance, presumably in China, but not necessarily – but surely in Asia.

Other markets include the digital home, wireless microphones and professional audio and broadcast.

Interestingly the last MaxLinear purchase, which had looked to us as a distressed purchase of the G.hn division of Marvell, has a similar upside and MaxLinear is expected to make a bid for the chairmanship of the HomeGrid Forum (G,hn body) in due course. It joined the HomeGrid board of directors this week.

The sale was agreed under the old regime of CEO Sehat Sutardja (who left last summer), and it took a while to complete. Since the deal was struck Liberty Global has become one of the company’s customers, and placed more orders, and more shipments have been delivered in both the US, Europe, but more importantly in China.

We understand that there is a major RFP now out in China, relating to G.hn over Coax, versus MoCA – we are unsure of how MaxLinear can lose this, as it now dominates both technologies (although in G.hn there are at least some credible rivals such as Sigma Designs). All of which may lead to a significant upside on that deal, particularly in the territories that Exar has been so good at in the sales channel.

MaxLinear started life in the distant market of Japan, taking a 70% market share in the first generation of 1 Seg chip receivers in phones for ISDB-T video, so is no stranger to being better placed in overseas markets and reporting in the US.

The details of the Exar deal is that MaxLinear will acquire it for $13 a share in cash, a 22% premium over the Exar closing price last week. It is roughly $700 million and that equates to $472 million net of Exar’s cash. The deal will be funded by from the combined balance sheets and a $425 million term loan.

Quarterly revenues will be around $125 million, but rising fast, on a rising margin. And if that happens, it will be worth a lot more.

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