Microchip, ON propose to buy Atmel for $2.3 billion

By Anupreeta Das

SAN FRANCISCO (Reuters) - Chipmakers Microchip Technology Inc (MCHP.O) and ON Semiconductor Corp (ONNN.O) have jointly made an unsolicited offer to buy rival Atmel Corp (ATML.O) for $2.3 billion, seeking to battle slowing growth in the semiconductor market by combining the products they offer.

The $5 a share offer, announced on Thursday, represents a 52.4 percent premium over Atmel's closing price on Wednesday. The companies said they would consider modifying the all-cash proposal to include a stock component should Atmel shareholders prefer it.

Atmel shares rose more than 26 percent on the news after being initially halted, but fell short of the $5 mark as investors remained concerned the complex deal would not go through.

The financial markets meltdown has made it near impossible for debt seekers to find the money on attractive terms. In August, chip design software maker Cadence Design Systems Inc (CDNS.O) pulled its $1.5 billion unsolicited offer for rival Mentor Graphics Corp (MENT.O) because it could not raise the debt required for the purchase.

On a conference call, the chief executives of Microchip and ON Semi were bullish about completing the deal, and said they would keep all options open, including launching a proxy fight, to do so.

Atmel, which has hired Morgan Stanley and Credit Suisse as financial advisers, said in a statement it would review the offer in "due course."

The transaction would involve Microchip, a maker of microcontroller and analog chips, buying Atmel for $5 a share, and then selling some assets to ON Semiconductor. At the same time, Microchip would run a process to sell Atmel's ASIC chips business to another semiconductor maker.

Structuring the offer this way reduces the risk for Microchip, which is interested only in acquiring Atmel's microcontroller business, Microchip Chief Executive Steve Sanghi said in an interview.

Microcontrollers are chips embedded in a variety of electronic devices such as televisions that control the functions of that particular device.

Atmel also makes RF, or radio frequency, chips and nonvolatile memory -- a kind of memory that can store data without power. ON Semi, which sells chips to automotive, communications and other industries, would buy these businesses as part of the deal.

Atmel is in the midst of a turnaround strategy centered on developing its core microcontroller business that some analysts said will help the San Jose, California-based company push up its share price.

Strong management and market share gains in the microcontrollers business make Atmel a "compelling" growth story, UBS analyst Uche Orji wrote in a recent research note.

In a letter sent to Atmel's board Wednesday night, Microchip and ON said the turnaround strategy has produced only lackluster results, and the "rapidly deteriorating U.S. and global macroeconomic environment ... will magnify these risks."

Sanghi also refuted analysts' concerns that the economic downturn could make it tough to do a deal right now.

"This is the best time to retain employees, take redundant assets out ... when some growth opportunities are less available because of difficult market conditions," he said on the call.