Apple Enters into $600-Mn Deal with Dialog

Apple Inc is taking control over the power-management tech at the heart of its iPhones in a $600 million deal with Dialog Semiconductor. This also secures the German-listed company’s part as a supplier to the US tech giant.

The agreement to license tech and take on people from the Anglo-German chip designer is not only rare, but it’s also the largest of its kind by the iPhone-maker, whose most recent sizable acquisition was the $350 million purchase of Face ID creator PrimeSense in 2013.

Dialog shares swelled as much as 34 percent on Thursday, their most since 2012, as the agreement bough the company some time to decrease its dependence on Apple, which it expects to account for three-quarters of this year’s sales.

Dialog’s shares had tumbled earlier this year when it said that Apple planned to use chips from another supplier.

Dialog Chief Executive Jalal Bagherli told reporters that he could now lead a “managed, smooth” transformation of the business as Dialog seeks new opportunities in areas such as the Internet of Things, which includes connected devices like home speakers, smart watches, and fitness trackers.

Since the first iPhone devices a decade ago, Apple has used Dialog power-management chips to extend their battery life. Under the deal, Apple is buying patents, taking on a 300-strong engineering team, most of whom have already worked on chips for Apple devices, and Dialog offices in Britain, Italy, and Germany.

Dialog said that its 2018 revenue would not be influenced and it would continue shipments of existing main power management integrated circuits (PMICs) to Apple. It anticipates to sell current and future generations of so-called sub-PMICs to Apple.

Bagherli said that Apple increasingly viewed main PMICs, which are central and crucial to the operation of its devices, as a strategic element that it wanted to control directly. This wasn’t the case for sub PMICs that manage features like on-board cameras.

After the deal, Dialog expects Apple to account for 35 to 40 percent of its overall revenues in 2022. That is down from roughly 75 percent in the current year. Headcount will fall to 1,800.

The chipmaker also said that it would start a share buyback program for up to 10 percent of its stock following its next quarterly trading update. The $600 million windfall will add to Dialog’s already healthy net cash position of $525 million, according to analysts.

Other chip designers in Europe have floundered to manage their relationship with Apple due to its sheer scale. Britain’s Imagination Technologies ended up being sold to a Chinese-backed fund last year after losing Apple as its client.

“Dialog has bought itself much more than just time,” said Karsten Iltgen, who is an analyst at Bankhaus Lampe, which has a “buy” rating at the stock. “Its Apple business has been clearly defined and put on a sound long-term footing.”

Half of the deal’s total value, or around $300 million, is cash for the Dialog engineers and offices and the other $300 million is pre-payment to Dialog for supplying chips over the next three years, the companies stated.

Dialog said it would continue to deliver chips to other customers, focusing on automotive and internet of things markets, among others.

It predicted that its sub-PMIC business would achieve compound annual growth rates of 30 to 35 percent between 2018 and 2022. Its AMS, Connectivity, and Automotive & Industrial business would grow at a 10 to 15 percent rate.

The deal represents an expansion of Apple’s chip design operations, which kicked into high gear in 2010 when the company released its first custom processor for the iPad and iPhone.

Apple is purchasing around 16 percent of Dialog’s workforce. Apple stated that these employees would stay in Europe and would report to Johny Srouji, who is the company’s senior vice president of hardware technologies who oversees Apple’s chip design efforts.

“Our relationship with dialog goes all the way back to the early iPhones, and we look forward to continuing this long-standing relationship with them,” Srouji said. Apple has added around 20,000 employees in Europe since 2000.

The company already has chip design centers in Munich, Germany, where it has 1,000 staff under its wings, and St Albans, Britain. The deal will give Apple four more from Dialog, in Livorno in Italy, Swindon in Britain, and Nabern and Neuaubing in Germany.

The transaction is expected to close in the first half of 2019, subject to customary closings and regulatory approvals, Dialog stated. It added that it expects annual operations savings of $35 million from the deal, but it declined to provide more detail on its financial impact ahead of an investor presentation to be held on November 1.

Dialog said that Qatalyst Partners served as its financial adviser and Linklaters acted as its legal counsel.

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