Virage Logic has announced its intent to acquire CPU IP vendor ARC International in an all-cash transaction, for approximately $41 million. The proposed transaction is subject to approval by 90 percent of ARC shareholders.
The acquisition would add configurable CPU cores and the company's development environment, and perhaps more significantly, several powerful clusters of application-specific hardware and software IP to the Virage portfolio, complementing the company's strengths in foundation digital IP, memory IP, and high-speed interface IP. The result would be not so much a broad-range IP provider as a complete systems solution house offering hardware, software, and tool clusters with major footprints in the audio processing, mobile media, and mass storage markets.
The move fits chronologically into a pattern of expansion in Virage's product line. The company's roots are in digital cell libraries for cell-based ASIC design. To that, Virage has added memory compilers and, with recent acquisitions, DDR DRAM controllers, PCI, MIPI, and other high-speed interface IP. A processor core fits into the sequence of increasingly complex IP acquisitions.
Virage President and CEO Alex Shubat said that the ARC configurable processor core was a zero-overlap complement to Virage Logic's current product line. But he emphasized the importance of ARC's application focus over the significance of its hardware IP. "They take applications all the way to silicon," Shubat said. "I think the way to look at this is not that ARC is a processor company, but that they have application implementations that are processor-centric."
The acquisition comes as ARC had reached a critical point in its history. The company has been running significant losses for years, with license sales and royalty revenue always lagging behind the costs of customer support and continued research and development. This has eaten away a cash pile of about $250 million generated by ARC's IPO in 2000. As of its latest filing, ARC had approximately $14 million in cash and short-term investments. Meanwhile, assisted by sharp cuts in expenses, the company has been moving closer to break-even operation. The most recent report also cited a June restructuring that is expected to result in about $10 million in annual savings, approaching the current annual rate of operating loss of about $14 million.
"I think it is very significant that ARC is now approaching break-even in a very difficult economic environment," Shubat said. He added that with the elimination of some duplication in general management and administration expenses, and with the savings when ARC no longer functions as an independent UK public entity, the net cash flow from the ARC organization should be positive. "We expect the acquisition to be accretive to fiscal 2010 earnings per share to the tune of about $0.10 to $0.14," Shubat said.
From both strategic and financial points of view, then, the ARC acquisition looks to be a potential bargain. Virage is paying less than twice trailing annual revenue for the company, while expecting a positive earnings impact in the next fiscal year. The processor cores will fill out Virage's IP portfolio. And the addition of complete application packages in audio, media, and storage will begin a fundamental change in the way Virage Logic relates to its customer base.
Virage Logic
ARC International
