Cmus Essay

T-Mobile (TMUS) Acquisition Strategy for Cirrus Logic (CRUS)
Corporate acquisitions are an integral component of long-term business strategy with the desired goal of increased revenue, profitability and growth. TMUS has established itself as an innovative, cost focused company and has successfully seized market share while building a loyal customer base. In order to maintain and enhance their standing in the industry, TMUS should consider an acquisition strategy based upon the principle of efficiency and pursue CRUS as a target for takeover. CRUS is a provider of audio and voice IC products renown for high quality, low power, small size and optimal performance. Its chips are used in a variety of cellular and electronic devices covering

a wide spectrum of audio and mobile technologies with a specialization in crystal clear transmission. Recently released products include; audio codecs and DSP’s, amplifiers, MEMS microphones, and SoundClear embedded software. Consequently, by acquiring CRUS, TMUS gains access to a diversified product line which will aid in expansion of its growing customer base.

Furthermore, because CRUS is a fabless company, it does not need to own or operate foundries for production. Instead it has developed a plethora of strategic alliances with a network of third-party contractors and chip assemblers for the manufacture, assembly and testing of its products. This strategy has allowed CRUS to keep CAPEX minimized and enabled them to focus their resources on design and development thereby encouraging innovation while reducing operational and financial risk (Zachs, 2017). The objective for the acquisition of CRUS would be to provide TMUS access to lower cost and higher quality software and hardware components allowing them to evolve their strategic position from cost focus to cost leadership by taking advantage of economies of scale in their manufacturing processes. Additionally, this acquisition will allow TMUS to take control over one of its competitor’s major suppliers as more than eighty percent of CRUS current business revenue stems from sales to Apple Inc. (Neiger, 2018). Interestingly, CRUS was once a rumored takeover target of Apple, but the acquisition never came to fruition (Truta, 2010). Moreover, CRUS strong manufacturing

alliances will serve as the arena in which TMUS will seek to exploit (Verma, 2018). This acquisition will be the vehicle TMUS needs to solidify its position as a cost leader in the industry and because of CRUS existing manufacturing infrastructure, TMUS can move immediately in reference to staging. Furthermore, the acquisition of CRUS would enable TMUS to assume a broader differentiation strategy as their ability to deliver key differentiators across their entire spectrum of product offerings would be accentuated. Lastly, the economic logic for this acquisition is based upon financial analysis of CRUS net present value, internal rate of return and the payback period of their acquisition costs.
The first aspect of the financial analysis will be gauging the net present value, (NPV), of CRUS to evaluate the future cash flows by discounting forecasted revenues for the next ten years to their present value. In this case, the NPV of CRUS was $34.16M meaning the acquisition would yield net positive financial results for TMUS and should be accepted. This figure was attributable to several factors including an EBIAT/Revenue rate of 15.4% resulting in a positive revenue growth curve with assumptions made that this ratio will remain constant over the ten-year period forecasted. Also, a low 3.8% CAPEX rate which kept net working capital inline assumes that the average CAPEX of the previous ten-years will prove accurate over the next forecasted ten-year span. Furthermore, the favorable discount rate of 1.03 resulting from several advantageous kWacc factors all of which are assumed to hold constant and lastly an acquisition cost of $2503M stemming from limited long-term debt and a market cap reflecting CRUS current stock price recently hitting a 52-week low (Derrick, 2018). Resultantly, analyzation of NPV results in a recommendation for TMUS to acquire CRUS.
The second financial analysis relates to CRUS internal rate of return, (IRR). Whereas NPV produces the present value of cash flows subjected to a discount rate, IRR provides a rate of return upon adjusting the NPV to zero. The IRR functions as an indicator of profitability as evidenced by yield which contrasts with NPV which is an indicator of net value added. Therefore, the IRR of CRUS would need to be higher than the Wacc of TMUS to yield a positive net present value. The IRR of CRUS was calculated at 3.7% which exceeds TMUS IRR of 3.49% meaning that this acquisition would yield positive returns for TMUS assuming that all factors hold constant for the ten-years forecasted. Because CRUS IRR exceeded that of TMUS, analyzation of IRR results in a recommendation for TMUS to acquire CRUS.
A third analysis can be computed by finding the payback or break-even period of CRUS acquisition costs. The payback period is the amount of time needed for cumulative returns to equal cumulative costs and is, in effect, a measurement of risk with the ultimate goal being the acquisition paying for itself in the shortest amount of time. For purposes of this exercise, the maximum length of time to reach the break-even point was pinned at ten years. Results of CRUS payback analysis reveal a positive EBIAT curve resulting in favorable cash inflows which when combined with low CAPEX and the resulting low cash outflows allowed for a payback period of eight years, eleven months. The payback period again assumes that factors will remain constant as stated. Because this time period resulted in a break-even point of less than ten years it is recommended that TMUS acquire CRUS.
In conclusion, upon careful consideration of the elements of a good efficiency strategy; Objective, Research, Economic Logic, Arenas, Vehicles, Staging, and Differentiators, and a comprehensive financial analysis of NPV, IRR and Payback Period, indicators suggest TMUS should execute a strategy to acquire CRUS.
WORKS CITED
Derrick, J. (2018). “Cirrus Logic Investors Should Wait For Clarity On iPhone Numbers, Non-Apple Business.” Retrieved from: https://www.benzinga.com/analyst-ratings/analyst-color/18/02/11141924/needham-cirrus-logic-investors-should-wait-for-clarity-
Neiger, C. (2018). “Here's Why Shares of Cirrus Logic Slid 10% Last Month.” Retrieved from: http://www.pantagraph.com/business/investment/markets-and-stocks/here-s-why-shares-of-cirrus-logic-slid-last-month/article_c48c0c74-b28c-508b-ba9a-1ed09d34a4e5.html
Truta, F. (2010). “Apple to Acquire Audio Chip Maker Cirrus Logic – Rumor.” Retrieved from: http://news.softpedia.com/news/Apple-to-Acquire-Audio-Chip-Maker-Cirrus-Logic-Rumor-154985.shtml
Verma, D. (2018). “Helio P25 and dual rear cameras launched in India.” Retrieved from: https://techlomedia.in/2018/04/meizu-pro-7-dual-displays-helio-p25-dual-rear-cameras-launched-india-rs-22999-56225/
Zachs Equity Research, (2017). “Is Cirrus Logic's (CRUS) Place in Your Portfolio Justified? Retrieved from: https://sg.finance.yahoo.com/news/cirrus-logic-apos-crus-place-110011713.html