Can Infineon's acquisition of Cypress help it leap to the top of the automotive chip list?

In the field of automotive electronics, NXP Semiconductors has always been ahead of Infineon .

Following Infineon’s acquisition of Cypress , the combined revenues of Infineon (€7.6 billion) and Cypress ($2.2 billion) will now also push them ahead of NXP (€9.4 billion), according to financial data.

It is understood that Infineon's acquisition of Cypress will be completed and will not be affected by the COVID-19 pandemic. Its financing agreement with the bank is watertight and Infineon will have 2 years to refinance the current bridge loan (the interest rate may be higher given the current credit environment). The 9 billion euro acquisition transaction will still be carried out with a target combination of 30% equity and 70% debt. After financing, this will still give them a healthy balance sheet with net cash of 1.25 billion euros.

The acquisition adds value to Infineon in multiple segments, but we think its automotive chip segment is the one that will benefit the most. Cypress will make Infineon a leader in the larger automotive market, with a combined market share of about 13% after the acquisition, while rival NXP is in second place.

For automotive products, Infineon divides automobiles into 5 segments based on the application areas of semiconductor content: 1) body, 2) infotainment, 3) chassis, 4) powertrain, 5) advanced driver assistance systems ('ADAS'). The powertrain of a modern car includes the engine, exhaust system, transmission, drive shaft, suspension and wheels. Meanwhile, the body and chassis of a car refer to the vehicle frame that provides the supporting structure for the vehicle. The infotainment system provides entertainment and information to the driver and passengers. Finally, ADAS is the driver assistance system or the brain of the autonomous car, designed to help the driver through various safety and adaptive functions using sensors, camera-based vision systems and radar detection.

Currently, Infineon already provides the world's leading Advanced Driver Assistance Systems ('ADAS'), including its RASIC radar chips, AURIX microcontrollers and REAL 3 time-of-flight image sensors. Infineon's 32-bit microcontrollers, HybridPACK IGBT modules and XENSIV sensors dominate the automotive sector. Their acquisition of Cypress has strong strength in storage products such as NOR flash devices, which will further enhance its capabilities in ADAS, and its popularity is increasing with the increasing storage needs of smart cars. The Cypress product portfolio includes the highest-performance NOR flash memories, such as Semper, serial and parallel chips.

In addition, Cypress’s customized Bluetooth and Wi-Fi technologies will fill the gaps left by Infineon in this area, allowing it to also cover the automotive infotainment segment. More importantly, the addition of Cypress’s state-of-the-art Capsense and MagSense sensor product lines and its Traveo family of microcontrollers complements the rest of Infineon’s automotive solutions. Therefore, we believe that this acquisition brings Infineon a huge advantage beyond market share gains, as Cypress’s portfolio enhances its broad product coverage in the automotive sector and enables it to cover all application areas to support its leading supplier position in the promising electrical and autonomous vehicle markets.

As Infineon's Investor Relations highlighted, Cypress brings more than just automotive solutions. Cypress's Internet of Things ('IoT') segment will also be able to synergize well with Infineon's Industrial Power Control and Power Management and Multi-Market segments. This helps them offer several joint system solutions outside of automotive, which include Cypress's products in other areas. These include cloud system solutions for IoT, motor control solutions for indoor fans in air conditioners and control solutions for smart homes, which can be found in Infineon's investor presentation. Investor Relations is also particularly bullish on the Digital Security Solutions division, which they believe will double its revenue share.

Infineon's investor relations department said that Infineon's acquisition is indeed a strategic move to increase market share, and apart from adjusting the sales and marketing teams, there will be little operational integration to drive cost synergies. As a result, the company's cost synergies are estimated to be only 180 million euros, while revenue synergies are 1.5 billion euros.

Fortunately, Infineon made long-term estimates for revenue synergies, as the unexpected COVID-19 environment will obviously destroy all short-term synergies. While we agree with the company's estimates for cost synergies, we expect higher revenue synergies from this acquisition, primarily in the automotive space.

In addition to very complementary product portfolios and Infineon's higher market share from automotive, the two companies also have many common customers. Some of the major automotive customers that Cypress serves for Infineon include Bosch, Continental, Delphi, Denso, Mitsubishi Electric, BMW, Toyota and Volvo. We believe this will increase the success rate of cross-selling complementary products and expand supply scale.

In addition, in the next few years, the automotive market will shift from traditional cars to electric cars and autonomous vehicles, which will cause a surge in demand for automotive semiconductor solutions. For the world's leading automotive chip suppliers, we see this as a tailwind. Therefore, by 2028, I think they will achieve long-term revenue synergies of 2.5 billion euros per year.

Infineon and Cypress are excellent companies, both of which have a broad product portfolio, diversified market segments and regional revenue. However, Infineon's revenue growth has been slowing in recent years. But on the other hand, Cypress has achieved tremendous growth, tripling its revenue between 2014 and 2019. But Cypress also has a shortcoming, that is, they lack the ability to provide a more complete end-to-end solution. The merger of the two companies has established a complete product portfolio for automotive, power and discrete modules, and security integrated circuits. Although the acquisition is not expected to generate large cost synergies, in the long run, we believe that the automotive sector will generate huge revenue synergies.

We expect Infineon to have a leading market position in new markets in the automotive sector, enabling it to reap significant benefits from the electrification and automation of vehicles. We see higher cross-selling of products in their combined portfolio among familiar customers of Infineon and Cypress. Although there are currently severe headwinds in the automotive market due to demand destruction caused by the COVID-19 pandemic, we have factored this into our valuation and believe that long-term fundamentals will remain intact.