The semiconductor space has been enveloped by an epic spat of M&A for the better part of the last two years, equaling nearly $200 billion in deals. Much of this urge to merge has been in support of PC & Smartphone chip makers desperate attempt to diversify to emerging technologies, resulting in some of the largest technology deals ever, largely centered around Artificial Intelligence, Autonomous Driving and the Internet of Things (IoT).
The premiums, on a price to sales metric been massive, with INTC’s $17bn bid for ALTR last year, and ADI’s recent $15bn bid for LLTC, both about 10x trailing 12 month sales of about $1.5bn, only outdone by Softbank’s $32bn bid for ARMH at a whopping 22x sales!! As the game of musical chairs winds down, and the targets become smaller, the premiums paid are likely to be smaller.
Cypress Semiconductor (CY) has often been rumored to be a takeover target, with its relatively small market cap of $3.66 billion, trading at about 2x their expected 2016 sales, which are expected to grow 19% yoy, and 10% in 2o17 might be a fairly easy tuck in for larger competitors or possibly private equity.
There appeared to be a bullish roll in calls in the stock today when it was trading $11.31 shortly after the open. A trader sold to close 11,500 Jan 11/14 call spreads at 55 cents and bought to open 11,500 March 12/15 call spreads for 57 cents. This new call spread breaks-even at $12.57, up 11% from the trading level, with max profits at $15, up about 33%, which would place the stock at about a market value of $4.8bn, or about 2.5x sales.
Looking at the 2 year chart of CY there appears to be decent technical resistance at $12, the level the stock broke down from in 2015, and was subsequently cut in half, only to be rejected on three occasions there this year. I guess more troubling is the stock’s early October breakdown below the uptrend that had been in place from its February lows:
[caption id="attachment_69043" align="aligncenter" width="639"]
CY 2yr chart from Bloomberg[/caption]
Normally if we thought there was an underlying takeover bid in a stock like this we might look to finance a takeout trade like an out of the money call spread by selling an out of the money put, but the under-performance of the stock, and the poor technical set up might lend its self to the way this trader appears to be approaching the trade… by rolling call spreads up and out as the stock moves higher towards technical resistance. For example, we might have considered selling the March 10 put at 40 cents vs buying the March 12/15 call spread for 57 cents, resulting in a 17 cent debit. This put sale lowers the break-even, would raise the profit potential by 40 cents and lowers the premium losses below $12, but importantly above $10. The real problem in this scenario is that selling a put naked obligates you to be put the stock on expiration at or below the strike, which dramatically increases the risk of merely be long premium and defining your risk to the cost of the call spread.