Over the summer, I concluded it was a maximum mess in the case of MaxLinear, Inc. (NASDAQ:MXL). This came as the business outlined a dismal third quarter outlook while terminating the deal with Silicon Motion Technology Corporation (SIMO).
Quite frankly, I believed that the news was both good and bad at once, making it hard to read into the market reaction, as the news caused massive volatility in the share price. Given the many moving parts in the business case and investment thesis, including potential legal overhang from terminating the deal, I could not commit myself to buy the dip. As the uncertainty remains the name of the game heading into the fall, I am not willing to commit here.
A Recap
MaxLinear was a $20 stock ahead of the pandemic, as its shares and the business saw some real momentum after it acquired the Home Gateway platform from Intel (INTC) in a $150 million deal.
This was a substantial deal, adding substantially to just over its $300 million business. Shares rallied in a huge manner and nearly hit the $80 mark by year-end 2021 and early 2022. Subsequently, shares fell to the $40 mark in May 2022, while the business saw real underlying growth.
Strong growth and M&A meant that 2020 sales rose in a convincing manner to $479 million, as 2021 revenues came in at $892 million. The company posted GAAP operating profits of $65 million in 2022, resulting in GAAP profits of $0.53 per share. Adjusted earnings came in at $2.69 per share, with realistic earnings seen somewhat in between both earnings metrics following various adjustments being made.
First quarter sales for 2022 came in at just $209 million as the company guided for second quarter sales at $205 million. This meant that shares fell to the $40 mark that spring, with the company commanding a $4 billion enterprise valuation at those levels. The whole investment thesis changed as the company reached a $3.8 billion deal to acquire Silicon Motion at the time, with over 80% of the deal tag to be paid for in cash.
With pro forma net debt seen at $3.3 billion, leverage ratios would exceed 5 times EBITDA, based on earnings at a good point in the cycle. This combination made me very cautious as I decided to stay out of the situation.
Since the deal announcement, shares of MaxLinear have traded in a $20-$40 range, displaying quite some volatility. In the end, 2022 sales rose to $1.12 billion with GAAP operating earnings posted at $180 million, as net earnings of $125 million came in at $1.55 per share, with adjusted earnings posted at $4.23 per share.
The company started 2023 on a soft note, with first quarter sales down 6% to $248 million, as second quarter sales were seen only between $175 and $205 million. Second quarter sales did end up falling 26% to $184 million, with adjusted earnings reported at just $0.34 per share. Moreover, the third quarter guidance was utterly soft, with sales seen between just $125 and $155 million.
With the company not in a position to take on and assume the debt in connection with the proposed deal with Silicon Motion, the company terminated the deal (actually after Chinese regulators approved the deal). This came as Silicon Motion itself has seen tougher results as well, as all the news caused quite some volatility.
Trading at just $22 in July, the 88 million shares of MaxLinear commanded a $1.76 billion equity valuation, which even includes a $123 million net cash position. The $1.64 billion operating asset valuation stood in relation to a $1.1 billion and profitable operation in 2022. The issue is that sales are trending at just $600 million here, while the company posts losses in the meantime.
Terminating the deal actually seems to be a good thing, despite the legal uncertainty, as the company would avoid paying too much for a company (largely in cash), and moreover, it would save the company from severe financial distress down the road. That said, the fundamental support and legal overhang would be huge in all likelihood, as I saw no need to get involved in this uncertain situation.
An Update
Since July, shares of MaxLinear, Inc. have traded in a relatively tight range between $21 and $25 per share, resulting in relatively subdued volatility in an uncertain period of time.
After pulling the plug on the deal late in July, an update followed on the 7th of August by Silicon Motion. Silicon Motion categorically rejected the termination of the merger agreement and announced that it would vigorously pursue remedies and hold MaxLinear liable for incurred damages. MaxLinear responded the same day and mentioned that the termination was based on a material adverse effect and multiple contractual failures, although it failed to specify the exact MAC clause triggered.
By the middle of August, MaxLinear provided an update after the firm received confirmation from Silicon Motion that the merger agreement was terminated and was seeking damages through the Singapore International Arbitrage.
For the near term, there will be a long legal overhang. Typically, arbitration in Singapore might take 12-18 months according to MaxLinear’s CFO, which means that investors could see uncertainty for over a year to come. Moreover, the termination fee of $160 million might be the floor in these damages, as likely the damages (at least to Silicon Motion’s investors) are greater here, given the big cash component of the original deal.
On top of this uncertainty remains the softer operating performance, as the best Marvell can do is prepare the business for a stand-alone road and improve the performance this way while building up a cash position in anticipation of the significant legal headwinds. Given the continued overhang, I continue to refrain from having a real interest in MaxLinear, Inc. shares here.
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