This Deal Is a $4.4 Billion Bad Bet on Self-Driving Cars
A test driver removes his hands from the steering wheel of a Tesla Motors Inc. Model S electric automobile fitted with self driving technology. (Photographer: Andreas Arnold/Bloomberg)

This Deal Is a $4.4 Billion Bad Bet on Self-Driving Cars

(Bloomberg Opinion) -- Fear has taken control in the bidding war for German lighting group Osram Licht AG. A raised bid of 4 billion euros ($4.4 billion) from AMS AG is well above what the target’s shareholders appeared happy to accept and what rival bidders had put on the table. Osram shareholders win. For AMS’s investors and staff, the risks have substantially increased.

The sweetener by the Austrian maker of semiconductors and 3D sensors followed a threat from private equity firms Bain Capital and Advent International that they might offer “meaningfully” more than AMS’s existing 3.7 billion-euro bid. Investors in the automative-lighting company saw that as just about credible: Osram’s share price was trading above the initial AMS offer. Shareholders looked set to pass on the bird in the hand.

Now the chances of Bain and Advent topping AMS look slim. The new bid is a heady 11.3 times Osram’s expected 2020 earnings before interest, taxes, depreciation and amortization. The two firms would need to dangle an even loftier price to make Osram shareholders reject AMS when its offer closes next week. If they did, their own clients should recoil in horror. Private equity brings no synergies to the situation. A knock-out proposal would require a substantially bigger piece of equity funding, making the challenge of doubling their money to hit their return hurdles incredibly stretching.

Osram’s supervisory and management boards had qualms about even the unsweetened offer based on the leverage of the enlarged company. Friday’s top-up is partly being funded by yet more debt. AMS ends up with more financial risk, and under pressure to extract additional synergies despite having made commitments on employment. This is a hard circle to square.

Why the urgency? Desperately diversifying into automotive gear may reflect concern about AMS’s core business in supplying smartphone components, particularly to the iPhone. Consumers are gravitating towards cheaper models of Apple Inc.’s iconic handset. Meanwhile, high-end iPhones are being sold at less of a premium. Suppliers will likely be leaned on to absorb some of that lost margin.

The best hope is that the panic over the acquisition is a calculated investment in laser components for sensors used in autonomous cars. But that requires faith in AMS’s forecasting abilities, which have proven unreliable in the past. Widespread adoption of self-driving cars is looking decreasingly likely within the next five years. It’s not even clear that they will need the laser-based detection systems that contain Osram components.

AMS's bid has a 63% acceptance threshold, and Osram shares were trading almost at the offer price on Friday. That probably doesn't foreshadow a counterbid. Rather, it's more likely investors see the deal just crossing the line, creating the chance to hold AMS to ransom for the remaining one-third of the stock. Of course, if too many investors withhold their acceptance to play that game, the bid will fail. This transaction is far from done.

Logically, Osram's support for AMS's first offer, based on its high price, applies just as well to the raised bid. By the same token, its existing concerns about the financial risk and strategic logic of this deal deserve still more attention.

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

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

©2019 Bloomberg L.P.

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