The $4 Billion Internet of Things Merger

Spansion Inc. (NYSE: CODE) should be pinging on your radar by now. If not, you’re clearly not tuned into the right channels.

The stock has jumped massively in the last 48 hours, spiking to a five-year high, and it cannot be overlooked.

Spansion announced on Monday evening that it will be merging with Cypress Semiconductor Corp (NASDAQ: CY) in an all-stock transaction valued at approximately $4 billion. The combined entity will generate more than $2 billion in annual revenue and represents a major power consolidation in the part of the tech sector dealing in the “Internet of Things.”

We talk a lot about the Internet of Things (IoT) here at Tech Investing Daily. It’s one of the most important movements in technology. It spans both major ends of the tech sector — consumer and enterprise — and, in theory, it will include every machine you could possibly think of.

In short, it means everything that can be connected will be connected, from your refrigerator to the dumpster behind your office building. These “things” will generate their own data and communicate with other “things.”

The reason we’re so bullish on the Internet of Things is because the possibilities are practically endless. If you can think of some machine-to-machine connection, it could be the next new product or service.

Is the back gate of your house swinging open? That open connection could alert the doggie door and tell it not to let your dog into the backyard until it’s closed.

I could come up with these potential scenarios all day long.

This is why the merger of Spansion and Cypress is a major event. Both companies specialize in embedded systems, which is another name for computers that have a specific (often single) purpose within a larger framework of machines and computers.

With the combination, Spansion is undergoing a massive expansion for the second time in two years.

Spansion: What it Offers

Twenty years ago, Spansion was formed as a joint venture between chipmaker AMD and general tech company Fujitsu Ltd. It wasn’t until 2005 that the company even took the name “Spansion” and launched on its own as the third-largest flash memory company on the market, commanding a 14% market share.

Four years later, however, it was filing for Chapter 11 bankruptcy. With the super-low cost of flash memory, you see, third place in the market was not the most promising place to be.

The company used the bankruptcy proceedings to restructure and focus on more promising aspects of its business: embedded memory solutions, wireless communications, and intellectual property licensing. The company also discussed the possibility of a sale to a third party.

In 2013, Spansion bought out Fujitsu’s microcontroller and analog business for approximately $110 million, the idea being that it would help Spansion get into systems-on-a-chip (SoC) for the embedded market.

Systems-on-a-chip have become the dominant computer architecture in the mobile era, merging all the important computing power — from CPU to memory to sensor control to wireless communications — onto a single tiny chip.

The merger with Cypress Semiconductor will give Spansion access to a whole new set of technologies it had little experience with, such as touchscreen and peripheral interface solutions, solar panels, and aerospace and defense projects. It will give Cypress an improved position in embedded memory solutions, which it can use in its new programmable system-on-a-chip (pSoC) offerings.

“Our combined company will be a leading provider of embedded MCUs [or microcontrollers] and specialized memories. We will also have extraordinary opportunities for EPS accretion due to the synergy in virtually every area of our enterprises,” Cypress’ founding president and CEO TJ Rodgers said of the deal.

The Deal

Spansion shareholders will receive 2.457 Cypress shares for each Spansion share they own, and shareholders of each company will own about 50% of the post-merger company. Quarterly dividends of $0.11 per share will continue to be paid out.

The company’s board of directors will be split half and half between the two companies. The company will be headquartered in San Jose, California and will fall under the Cypress Semiconductor brand, since that company’s strategy thus far has been to acquire companies and keep them as wholly owned subsidiaries.

The combined entity beefs up Spansion’s fledgling efforts at systems and improves Cypress’ good flash memory position to an excellent one.

It’s going to be an important name to look for in the growth of the Internet of Things.

Good Investing,

Tim Conneally

 @TimConneally on Twitter

For the last seven years, Tim Conneally has covered the world of mobile and wireless technology, enterprise software, network hardware, and next generation consumer technology. Tim has previously written for long-running software news outlet Betanews and for financial media powerhouse Forbes.