by James Montgomery, news editor

July 21, 2010 - ON Semiconductor's $366M (¥33B) cash-and-stock bid for Sanyo's semiconductor business, which ends a multiyear effort to slough off the unit, is "the best choice" for the company and its employees for a number of reasons, according to analysis from domestic sources.

"This is a fantastic purchase price for such a large revenue stream of discrete, power, and embedded processing semiconductors," gushes Craig Berger from FBR Research, in a research note. With the deal, ON should "dramatically improve" its revenue/share ratio and ultimately benefit earnings.

Sanyo's semiconductor operation never really recovered from a Oct. 2004 earthquake in Niigata Prefecture, which cost it about ¥70B in damages and kept production offline for months. After floating the unit for sale in 2007 the company changed its mind (citing fundraising issues in the US) and kept it in-house. ON had been approached as a possible buyer at that time; Sanyo's restructuring efforts for the unit (projecting a ~¥1B operating profit this year, its first in four years, vs. -¥7.1B a year ago) rekindled interest in the two companies, and ON was the only prospective owner to agree to take all four lines of Sanyo's chip business (discretes, hybrid and bipolar ICs, and system LSIs), notes the Nikkei Business Daily.

Berger notes that the deal adds 50% to ON's revenue base, boosts its scale, purchasing power, and manufacturing prowess. New products in its portfolio include microcontrollers (to compete with Atmel, Microchip, TI, etc.), more ASIC capabilities (adding to its AMI Semiconductor business, acquired in late 2009), motor controllers (to compete with Fairchild and IR), and power modules. "Customers may come to rely upon ON, Semi more for total system solutions, and not just individual chips," he writes.

Another key benefit: access to Japan. ON has most of its business in the US and Europe, with not much customer base in Asia and Japan, notes the Nikkei Business Daily. With Sanyo's chip unit it not only gains a regional sales network (beefing its Japanese sales force from ~30 to ~300) but a strong regional brand as well, to help sell into major Japanese electronics customers.

Despite seemingly little overlap, there are surely some planned areas of cost-savings in combining the two companies. Berger suggests this will probably mean consolidating "some or all of Sanyo's 4-in, 5-in., and 6-in. fabs and some of its backend facilities," though future manufacturing facilities plans were not officially described.

Two possible (and minor) criticisms of the deal: Sanyo's 25%-30% gross margins are below ON's current threshold (43%), but Berger thinks this is "a short-term hit" and will be brought into line eventually. And of course integrating two companies is never easy, but it's even harder when crossing regions and cultures -- in this case, mainly North American and Japanese (and a lot of non-English-speaking employees). "It may not be as easy to close fabs and reduce headcount in Japan as it has been for ON Semi in other parts of the world," Berger suggests.

Bottom line: "This is a wonderful deal for ON Semi with lots of opportunities for cost reductions, fab consolidations, product cross-selling, and should allow ON to move further up the value curve with key customers," Berger says.