Tessera Technologies Inc. (TSRA), the technology licensing company run by CEO Tom Lacey, is acquiring DTS Inc. (DTSI), a provider of audio technology for mobile, home and auto markets, for about $850 million in cash, representing a 28% premium over DTS shares’ closing price of $34.33 on Monday, Sept. 19.

Shares of Tessera gained $1.49, or 4.45%, to $34.97, while DTS rose $7.89, or 23%, to $42.22 in midday trading.

San Jose, California-based Tessera and Calabasas, California based DTS said under the agreement DTS stockholders will receive $42.50 a share. DTS equity awards also will be assumed or exchanged for cash upon closing of the transaction. In addition, the companies said all of DTS's outstanding debt will be retired at the closing of the transaction.

The transaction comes as Tessera has been struggling to grow earnings from its technology licensing business in a climate where users of its technology prefer to litigate rather than settle disputes. The company’s litigation expenses have been increasing over the past year and are expected to remain high given its new aggressive enforcement campaign against Broadcom Ltd. before the U.S. International Trade Commission and courts in the Netherlands, German and the U.S. District Court in Wilmington, Delaware.

Tessera said the transaction has been unanimously approved by both companies' respective boards. Closing of the transaction is expected by late fourth quarter of 2016 or early first quarter of 2017, and is subject to regulatory approval as well as the approval of DTS's stockholders and other customary closing conditions.

The companies said the transaction will combine market leading audio and imaging innovators with complementary products, technologies, customer channels and intellectual property assets to enable the creation of an expanded, integrated platform to invent the future of smart sight and sound.

The combined company will be one of the world's leading product and technology licensing companies, with over 450 engineers focused on developing next-generation imaging, audio and semiconductor packaging technologies. In addition, the acquisition adds significant scale and diversifies revenue across end markets and customers. The combined company is forecasted to achieve pro forma 2016 revenue of approximately $450 million, nearly half of which will come from product licensing.

Tessera expects the transaction to be immediately accretive to its earnings per share and free cash flow. The combined company is expected to realize $15 million in annualized cost savings within the first 12-18 months following the closing of the transaction.

The company also expects revenue synergies from the expansion of addressable markets and leveraging of complementary customer channels and technologies.

Tessera will fund the acquisition with a combination of available cash on hand and approximately $600 million of committed debt financing from RBC Capital Markets. The combined company will maintain a strong balance sheet with pro forma cash and investments of approximately $100 million.

The company said the acquisition is expected to generate significant free cash flow that will provide flexibility to retire debt, fund quarterly dividends, explore M&A opportunities, and continue investments into its business units.

In connection with the closing of the transaction, the company will adopt a new corporate name stock symbol.

"Our acquisition of DTS's talented team and industry-leading products will represent a transformational step in the execution of Tessera's strategic vision, with exciting new product development and marketing opportunities,” Lacey said in a statement.

The two companies “complementary technology portfolios are ideally suited to deliver the next generation of audio and imaging solutions to mobile, consumer electronics, and automotive markets while expanding our ability to address incredible new opportunities in IoT and AR/VR,” he added.

DTS CEO Jon Kirchner and his management team are joining the new combined company.

"We believe that as part of Tessera we will be in a unique position to deliver the world's leading audio and imaging solutions to all of our key markets and drive meaningful value for our combined customers, partners and employees,” Kirchner said in the statement.

Tessera said it was advised on the transaction by GCA and Skadden, Arps, Slate, Meagher & Flom LLP. DTS said it was advised by Centerview and DLA Piper LLP.

In August, Tessera said its second quarter net income fell to $23.5 million, or 48 cents a share from $30.2 million, or 60 cents a share. Operating income fell to $30.2 million, or 60 cents a share, from $31.5 million, or 58 cents a share, a year ago. The company was expected to earn 56 cents a share, according to the average analyst estimate.

Litigation expenses increased to $5.3 million from $3.5 million. Tessera increased research and development spending to $10.3 million from $7.9 million. Patent amortization expenses increased to $6.05 million from $4.7 million.

The company has said that the enforcement campaign against Broadcom means an increase in litigation expenses in the range of 4% to 10% of revenue. That means Tessera could spend up to about $26 million this year on the litigation. The company spent some $6.5 million on litigation in the first quarter.

For the third quarter of 2016, Tessera had said it expects total revenue to be between $61 million and $63 million; GAAP earnings per share to be between 39 cents and 41 cents per diluted share; and operating earnings per share to be between 51 cents and 53 cents per diluted share. For the full-year 2016, the company reiterated its total revenue guidance range of between $255 million and $270 million.

Tessera ended the quarter with cash and cash equivalents of $371.8 million.

Shares of Tessera fell 56 cents or 1.7% to $32.07 a share. They’ve traded between $26.21 and
$39.95 over the past year.

During a conference call with analysts and investors August, Lacey had said Tessera was “actively engaged” in discussions on possible acquisitions of “imaging related intellectual property.” He described the opportunities “as big and small” and stressed that Tessera would be cautious about the price of any transaction.

—To reach the reporter responsible for this story, please contact Dan Lonkevich at 707 318-7899 or dan@thepatentinvestor.com