“Their business has been growing. Even without acquisition last year, their business has been growing.” (CEO of MCHP, pitching the MSCC deal March 1, 2018)
Steve, you should have called! We could easily have shown you the organic 1-2% growth rate for MSCC in the last 2 years, and the -1% over the last decade. Or maybe, for a $10b acquisition, you should have done some due diligence.
The good news is that you will be right for the next 3 quarters because you get:
- a full quarter of Vectron
- a rebound in data center shipment after MSCC over-shipped and then under-shipped the channel
- strong timing revenue thanks to growing global investment in networks
- temporarily improving outlook for defense spending
[These were the reasons we had gone to the Bench in early 4Q.]
After that, the MSCC asset is a long term -1% CAGR revenue decliner, with a larger mix of declining revenue than growing.
Last point. Does it matter?
No. Clearly, SS doesn't care. There was no strategic rationale in this deal. Cross-sell will be a metric to ignore as design wins in any given year are tiny relative to the base revenue and will not be material in a reasonable timeframe to be the prime driver of a $10b outlay. Steve's vision, we infer, is to buy 'stuff', harvest the FCF, and buy more 'stuff'. As long as the cheap debt bubble doesn't burst, the Chipper will keep it together.
But these types of mishmash companies have been tried before in different eras. And they end up as product zombies that die over decades; companies with too many problems to solve, where ‘sudden’ revenue dissipation surprises management who can’t find enough fingers with which to plug the dike. By then, Steve may be long gone, but this is the kind of company that turns into a 20-25 year Short.
Remove MSCC from ideas, clock starts ticking on the Chipper
