Business Description:
Inphi is a semiconductor company making products for cloud computing and telecommunications, both of which are fast growing industries. Some of their products include COLORZ (15% of total revenues) which accounts for 34% of market share in DCI ports. Another important product made by Inphi is Spica (PAM4 DSP). This is an essential component of most data centers, allowing fast data transmission in between servers and also among other data centers over hundreds of kilometers. Inphi also makes semiconductors which will contribute to building the 5G Network by allowing long-term transmission of data over cable and also fibers using Coherent transmission as well as PAM over short distances.
These products are essential and are superior to those made by competitors such as Acacia Communications, Broadcom and Qorvo. For instance, Inphi launched the world’s first 50/100/200/400G PAM4 DSP, and this year the first 800G. Both their markets are growing at a very fast rate. Today, about 55% of revenues comes from Cloud (DC) and 45% from Telecom but they are shifting more towards Cloud.
14% of the revenues of the company come from Microsoft, 11% from Huawei and 10% from Cisco. Cisco is buying their main competitor Acacia, which could be a serious risk for the business. 65% of the revenues of the company come from Asia with China accounting for 45% of sales in 2019 and the US only 28%.
Catalyst:
The main catalyst for Inphi is the fast growth of cloud computing infrastructures and 5G. But today, we’re also going to look at Inphi as an arbitrage opportunity. Marvell Technology is set to acquire Inphi in a stock and cash transaction for about $10 billion, including debt. Each share of Inphi will be converted into 2.323 shares of Marvell and $66/ in cash. At current prices, the spread is 10.8% and since it is a stock and cash transaction, higher stock prices for Marvell means higher profit potential. 17% of the pro-forma company will belong to shareholders of Inphi.
Marvell operates is another semiconductor company which is also shifting their business more towards cloud computing. The company has been buying back shares and paying dividends and also making acquisitions. This acquisition is really going to be a boon for Marvell but they will need to take debt for it as it will cost them about $3.4 billion in cash. The current cash balance is only $647 million.
Read the full analysis here: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/27944207
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