Technology

Some Caution Remains in MKS After Newport Acquisition

Jon C. Ogg

Published: February 23, 2016 3:21 pm

Last Updated: January 13, 2020 12:48 pm

Newport Corp. (NASDAQ: NEWP) finally has found that buyout that had been speculated upon years ago. So what if those rumors were back during the explosive tech bubble of the late 1990s and early 2000s? MKS Instruments Inc. (NASDAQ: MKSI) has entered into a deal that valued Newport with a total enterprise value of $980 million.

This all-cash merger valued Newport at $23.00 per share. MKS Instruments signaled that the combined MKS/Newport would have approximately $1.4 billion in annual revenues, based on both of their 2015 historical results.

MKS also said the deal should be accretive to its non-GAAP net earnings and free cash flow during the first 12 months after the closing of the deal. They further said that the combined company should realize $35 million in annualized cost synergies within 18 to 36 months.

24/7 Wall St. could not help but notice that Merrill Lynch opined cautiously on the acquirer MKS Instruments. They suggest that MKS Instruments is acquiring Newport to expand its market size. The firm said:

MKSI announced an all-cash acquisition of Newport for $980 million enterprise value. Newport is primarily viewed as a laser company. The acquisition increases MKSI served available market, reduces semiconductor and increases exposure to industrial end market. But this does change MKSI’s envious net cash position to net debt.

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The firm’s Krish Sankar continues to rate MKS Instruments as Underperform with a $32.00 price objective. Sankar’s investment rationale for the equivalent of a Sell rating was shown as follows:

MKSI has leveraged its industry-leading supplier status to semiconductor equipment makers into new markets, including flat panel display, solar, medical devices, etc. But the company continues to trade off of semiconductor fundamentals. MKSI enjoys above-industry earnings growth during the upcycle and deeper troughs during the slowdown periods. MKSI gets high revenue growth leverage as an early cyclical, but at this stage of the cycle we do not see much margin or earnings upside.

Newport shares were last seen up over 51% at $22.81. Despite a 52-week low of $13.18, and this is the highest share price back to November of 2006. MKS shares were down 4.7% at $32.04. Its 52-week range is $29.00 to $39.65, and its consensus analyst target was last seen as $40.40.