Renesas’s IDT Deal Looks Good. If You Don’t Look Closely

(Bloomberg Opinion) -- Renesas Electronics Corp. makes a heck of a presentation.

In a 15-page deck explaining its $6.7 billion cash bid for Integrated Device Technology Inc., the Tokyo-based chipmaker talked up improved margins and earnings before interest tax, depreciation and amortization. 

Gross and operating margin would improve 1.6 percentage points and 1.2 percentage points, respectively, under the deal, it claimed.

Except the company went with IDT’s non-GAAP measures, which strip out pesky items that management at the San Jose components maker would rather ignore such as stock-based compensation, restructuring costs and adjustments to inventory values.

Under GAAP, gross margin at IDT was 4.9 percentage points lower for fiscal 2018  than what Renesas outlined in Tuesday’s presentation, and operating margin was less than half at 13.2 percent. Ouch!

Renesas’s IDT Deal Looks Good. If You Don’t Look Closely
These numbers matter. Whereas Renesas looks like it’s paying 29 times last year’s operating profit at IDT, an accounting using GAAP doubles that cost to 60 times.
Renesas’s IDT Deal Looks Good. If You Don’t Look Closely

Maybe management could justify such a hefty multiple if it were buying a fast-growing company with plenty of upside. Yet IDT’s revenue growth is pedestrian, at best, and barely 8 percent higher last year than it was a decade prior. And while in recent years management put together a string of profits — after two decades in which consecutive earnings years often seemed to elude it — profit isn’t exactly on a tear.

Renesas’s IDT Deal Looks Good. If You Don’t Look Closely

On a GAAP basis, IDT posted a net loss last year of $12.1 million (a loss margin of 1.4 percent). But good luck finding that little gem in the glowing report Renesas prepared.

In fact, if what you’re looking for is a wonderful deal at a reasonable premium then just don’t look too closely at all.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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