The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, March 6 (Reuters Breakingviews) - The present looks grim for automotive chipmaker Onsemi ON.O. A $6.9 billion hostile offer for rival Allegro MicroSystems ALGM.O could compound the near-term pain. Even with cost cuts, returns promise to be meager, while tariffs and economic gloom cast a bleaker shadow. Yet, despite it all, it’s easy to compute the logic: underlying trends in ever-more-connected cars might deliver more electrifying returns.

If a deal happens at the $35.10 per share price unveiled Wednesday night, it would be steep for Onsemi. Allegro’s estimated operating profit in 2026, according to LSEG, is about $200 million. If the buyer can cut 20% of operating costs it would glean $60 million of savings. That would simply offset the burden of tax at the 21% statutory rate, implying a 3% return overall. Moreover, Allegro is resisting, perhaps anticipating a bump. No wonder the bidder’s stock fell 6% on Thursday morning.

That said, a combination makes some sense. Both companies serve the auto market, and cars are including more chips over time as manufacturers add assisted driving or more-elaborate entertainment systems. Electric vehicles usually have about twice as many chips, for battery management and power delivery. Research outfit Yole Group predicts that the market for auto semiconductors will reach $100 billion in revenue by 2029, doubling from 2023.

The real tension, though, is timing. An industry semiconductor shortage in the early days of the pandemic turned into a glut; more car buyers are missing loan payments; on-again-off-again U.S. tariff threats could brutalize manufacturers. Onsemi’s revenue is expected to decline by 16% year-over-year in 2025.

Worse, EVs have taken off more slowly than hoped, while new U.S. President Donald Trump has said that he wants to end subsidies. Various executive orders could lower EVs’ share of the U.S. automotive market from 32% to 23% in 2030, analytics firm Wood Mackenzie reckons.

Onsemi’s stock is down roughly 60% from its 2023 peak, while Allegro is down over 40%. Yet the truth remains that global sales of EVs keep rising, growing 25% in 2024 to 17.1 million, according to Rho Motion. Falling prices as manufacturers across the globe roll out cheaper models will increase their appeal relative to conventional cars, raising the possibility of a sudden jump in adoption, similar to other technologies. That may indicate earnings estimates, and enthusiasm for both companies, may be too low. It’s a risky bet with lots of asterisks attached, but that would mean that Onsemi is striking while the notoriously cyclical semiconductor market is nearing a nadir.

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CONTEXT NEWS

Onsemi, the chipmaker formerly branded as ON Semiconductor, said on March 5 that it had proposed to acquire Allegro MicroSystems for $35.10 per share, or $6.9 billion including debt. Allegro rejected the unsolicited offer as inadequate on March 6.

According to a press release, Onsemi has repeatedly tried to engage Allegro, making an initial $34.50 per share offer on September 2.

Both companies make semiconductors for sensing and power management.

(Editing by Jonathan Guilford and Pranav Kiran)

((For previous columns by the author, Reuters customers can click on CYRAN/robert.cyran@thomsonreuters.com))