Atmel In The Hands Of Microchip Is A 'Game Changer'

According to Morgan Stanley analyst Craig Hettenbach, Microchip Technology Inc. (NASDAQ: MCHP)'s acquisition of Atmel Corporation (NASDAQ: ATML) is “the most identifiable catalyst for the stock we have seen in years.”

In a new report, Hettenbach explained why, after years of maintaining an Equal-weight rating on Microchip Technology, Morgan Stanley cites Atmel as the key to an upgrade to Overweight.

“We see the Atmel deal being 20% accretive for Microchip as it brings down Atmel’s higher cost structure (opex ratio of ~40% vs MCHP at 30%),” he explained.

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In addition, Morgan Stanley is looking for a repeat of Microchip's past successes in sharply improving the margins of acquired companies. While the acquisition will likely increase Microchip’s net leverage from 2.8x to 3.3x, Hettenbech expects that the more than $800 million in free cash flow that the company will generate post-merger will allow it to de-lever relatively quickly.

Morgan Stanley now has a $55 price target for Microchip’s stock.

Disclosure: the author holds no position in the stocks mentioned.