ON Semiconductor (ON, Financial) is reportedly exploring an acquisition of competitor Allegro Microsystems (ALGM, Financial) to boost its revenue, which has been declining for six consecutive quarters. This move has sent ALGM shares soaring.

• The potential acquisition comes shortly after ON announced a major restructuring, including a global workforce reduction of about 2,400 employees. This raises questions about the timing of a significant M&A move.
• CEO Hassane El-Khoury stated that the restructuring aims to eliminate non-core projects and prioritize areas with stronger growth potential, not just cut costs.
• Acquiring ALGM would enhance ON's presence in the EV and data center markets. ALGM, like ON, produces chips for power, sensing, and motion control systems. The automotive sector, which constitutes about 70% of ALGM's revenue, has been struggling due to high-interest rates and cautious consumer spending. ALGM's revenue from the Auto market fell by 33% last quarter to $130.1 million.
• ON, with around half of its revenue from the Automotive market, faces similar challenges, as seen in its weak Q4 results and soft Q1 guidance. The current EV and auto market weakness and potential tariffs add to the industry's challenges, making ON's interest in expanding in this area questionable.
• Valuation might be a key factor. ALGM shares have dropped nearly 50% since mid-2023, with a Forward P/E of about 39x, compared to over 70x in June 2024. ALGM's margins are slightly better than ON's at 49.1% versus 45.3% in Q4. ON may see ALGM's stock weakness as an opportunity for a discounted acquisition.

Overall, the potential acquisition presents a mixed picture. ON could solidify its leadership in the power and sensing sector, particularly in the automotive market, and acquire ALGM at a favorable price. However, expanding in a challenging automotive market might worsen ON's current growth issues.