Here’s why Dialog is buying Atmel for $4.6 billion

Dialog Semiconductor, a chip company most famous for making the chips inside the power bricks that come with your electronic devices, has agreed to buy Atmel Corporation in a cash and stock transaction valued at $4.6 billion. Atmel makes the microcontrollers that act as the “brains” inside many connected devices, such as Arduinos and Cree connected light bulbs. Meanwhile Dialog makes the silicon that supports quick charging technology, such as Qualcomm’s recent Quick Charge 3.0 efforts.

For Dialog, Atmel (ATML) will not only provide a larger portfolio of products to sell, but it has a sales channel to a lot of disparate partners including a large number of new entrants to the chip community in the form of the maker community. These new producers of connected products need power management chips, but often source them through massive distributors, shopping based on price as opposed to features such as charging time. Dialog, like many chip firms, sees an opportunity in finding the next hot device and getting in early, if it can find and get it’s chips inside these early products.

Additionally, the semiconductor industry is undergoing a period of consolidation, so it was only a matter of time before someone swooped in to purchase Atmel, which has a compelling array of products to offer in what is the hottest technology trend around. Atmel’s microcontrollers are an essential element of the so-called Internet of things, in which everyday objects get outfitted with sensors that can capture and share data.

That Dialog is the buyer is somewhat surprising, but the UK company has sales of the same size as Atmel, so this is really a merger of equals. Jalal Bagherli will continue to be the chief executive officer and executive board director of Dialog. Two members of Atmel’s existing board will join Dialog’s board following closing. After the deal closes the two companies should have a combined revenue of $2.7 billion, which leaves it at the smaller end of scale for semiconductor companies.

Rivals will include NXP, which is purchasing Freescale for $11.4 billion, and STMicroelectronics which had revenue of $7.4 billion in 2014

The companies expect the deal to close in the first quarter of 2016. Dialog intends to fund the transaction with a combination of existing cash, $2.1 billion of new debt, and the issuance to Atmel shareholders of approximately 49 million ADSs, expected to be listed on the New York Stock Exchange or the NASDAQ Stock Market. Post transaction it is projected that Atmel shareholders will own approximately 38% of the combined company.

The transaction is going to result in a substantial amount of debt for Dialog and the former Atmel shareholders. In the press release announcing the transaction, Dialog says it expects to “substantially pay down the transaction debt approximately three years after closing.” Dialog has received a financing commitment from Morgan Stanley Senior Funding, Inc. in connection with the acquisition. The financing commitment includes a $2.1 billion senior secured credit facility.

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Updated: This story was corrected to reflect that NXP is buying Freescale, not STMicroelectronics.

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