MILPITAS, Calif., June 8, 2015 -- Integrated Silicon Solution, Inc. (NASDAQ: ISSI) today announced that Cypress Semiconductor ("Cypress") has failed to finalize a merger agreement by the deadline of June 7, 2015 imposed by Cypress, even after Cypress received the negotiated draft agreement from ISSI on Friday, June 5, 2015.
As a result of ISSI's full cooperation, Cypress was able to complete extensive due diligence and hold numerous meetings with ISSI's management team. Also, a merger agreement has been nearly fully negotiated with the only remaining point of difference being the treatment of the antitrust risks of the transaction. ISSI filed an amendment to its proxy statement with the SEC on Friday, June 5, 2015 which further describes the due diligence process with Cypress and the deliberations of the ISSI board of directors. While Cypress has repeatedly downplayed antitrust concerns in its press releases, ISSI believes a transaction with Cypress presents significant antitrust risks in both the U.S. and Germany. As such, ISSI believes a transaction with Cypress would be unlikely to close without substantial divestitures or other actions required by antitrust authorities.
If Cypress had agreed to provide ISSI with protection against this antitrust risk, ISSI would have been in a position to finalize a merger agreement with Cypress this past weekend.
ISSI is disappointed that Cypress is not willing to agree to take all necessary actions to ensure receipt of antitrust clearance. Cypress has consistently downplayed the antitrust risks in its public statements. If Cypress truly believes that the transaction does not present significant antitrust concerns then it should be willing to provide the contractual commitment that the ISSI Board believes is in the best interests of its stockholders. By refusing to agree to the ISSI language, Cypress is placing ISSI's stockholders and the transaction closing at risk by creating an opportunity for Cypress to walk away from the deal if it does not receive a favorable antitrust decision. ISSI has made it clear to Cypress that the objective of the ISSI Board is to obtain the highest price for ISSI stockholders consistent with its fiduciary duties under applicable law. Therefore, ISSI would be prepared to immediately move forward with an agreement in compliance with the Uphill merger agreement, if Cypress were to commit to ensure a successful closing for ISSI stockholders.
Cypress Antitrust Issues
With respect to the anti-trust filings for a Cypress transaction, ISSI has determined that filings would be required in the U.S. and Germany and possibly other jurisdictions. In the U.S., the anti-trust agencies (the Federal Trade Commission (FTC) and the Department of Justice (DOJ)) have 30 days to review a filing and determine whether to issue the parties a burdensome subpoena for documents and information called a second request. ISSI believes there is a significant risk of a second request since Cypress and ISSI are head to head competitors with significant market share in the SRAM market. A second request investigation could cost each party over $3 million, take up to 9 months to complete, and result in divestiture of at least a portion of the SRAM business. In the U.S., the anti-trust agencies will issue a second request if there is any evidence that suggests that the acquisition may substantially lessen competition in any relevant market and such agencies are virtually certain to issue a second request for a transaction that reduces the number of meaningful competitors in a market from 4 to 3 or 3 to 2. ISSI believes that the FTC/DOJ would likely issue a second request with respect to a transaction with Cypress since Cypress and ISSI are the only full-suite providers of SRAM in the world. Other smaller competitors are limited in scope and geography. Specifically, Cypress and ISSI combined would have a total market share in the U.S. of over 80%, have over 90% share at the largest electronics distributor in the U.S., and would be the only supplier of SRAM to the automotive industry. The FTC/DOJ rarely close a second request investigation without conditions. For example, in the last fiscal year, the FTC/DOJ issued 25 second requests and ordered remedies or challenged 23 of those transactions. If the parties have high market shares for certain products and barriers to entry are significant, the FTC/DOJ would likely require divestiture of certain products and customers.
In Germany, ISSI believes the combined market share of Cypress and ISSI would exceed 70% share and that the combined company would be the sole supplier of SRAM to German automotive manufacturers. The German antitrust agency, The Bundeskartllamt, also has 30 days to review the proposed merger and, if it determines further examination is necessary, a formal main examination is initiated, which could take an additional three months. ISSI believes there is significant risk that The Bundeskartllamt would initiate a main examination and that, similar to the FTC/DOJ, it would require divestiture of certain products and customers.
Cypress has argued because the SRAM market has been moving to embedded SRAM from standalone SRAM, and since Cypress and ISSI are not major suppliers of embedded SRAM, the proposed transaction does not present any anti-trust risk. However, ISSI believes that there is a substantial chance that the agencies would conclude otherwise. First, sales of standalone SRAM are still several hundred millions of dollars annually and the standalone SRAM market is unlikely to disappear in the next 5 to 10 years; because there is substantial demand for standalone SRAM, the agencies may conclude that it is in a market distinct from a market for embedded SRAM. Second, the antitrust agencies may conclude that customers that require standalone SRAM cannot easily substitute it with embedded SRAM without significant redesign costs, if even possible. As a result, it is likely that the FTC will closely investigate whether standalone SRAM is in a market separate from embedded SRAM, and whether embedded SRAM acts as a price constraint for standalone SRAM for all customers, or whether for some customers, embedded SRAM does not constrain the demand or price for standalone SRAM. If the antitrust agencies do not agree with Cypress, there is a high likelihood that they will demand a divestiture of one of the parties' SRAM businesses.
The recent actions of Cypress illustrate their knowledge of the significant risk of these anti-trust issues. They have proposed the use of an ineffective "side letter" and surprisingly settled a long running anti-trust lawsuit against it by another SRAM competitor just one week before announcing its non-binding offer for ISSI. Due to the significant anti-trust risks, ISSI proposed to Cypress that under any merger agreement Cypress must take "all necessary actions" to comply with anti-trust rulings in order to close the transaction. This would eliminate antitrust matters as a condition for closing. However, despite their claims that anti-trust is not a significant issue, Cypress would only agree to take "all reasonable actions," which would mean that if Cypress did not like the decisions of the antitrust agencies they could walk away from the deal. Clearly, Cypress' position is not in the best interest of ISSI's stockholders, and could not be accepted, since a merger closing would be highly uncertain.
ISSI is a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) automotive, (ii) communications, (iii) industrial, and (iv) digital consumer. ISSI's primary products are high speed and low power SRAM and low, and medium and high density DRAM. ISSI also designs and markets NOR flash products and high performance analog and mixed signal integrated circuits. ISSI is headquartered in Silicon Valley with worldwide offices in Taiwan, Japan, Singapore, China, Europe, Hong Kong, India, and Korea. Visit ISSI's web site at www.issi.com.