Merger Mania in the Semiconductor Industry

Earlier this year, we published an analysis of the semiconductor landscape that became one of the most-read posts in the history of The Breker Trekker. That’s not too surprising, since business topics tend to have wider appeal than detailed discussions about verification techniques. That post focused on the top 20 semiconductor companies and the many changes in that list over the last 15 years. We mentioned a number of noteworthy mergers, acquisitions, and spin-outs that contributed significantly to the dynamic nature of the market.

The first three quarters of this year have seen a huge uptick in merger and acquisition (M&A) activity among semiconductor companies. Although many of these deals have involved second-tier players, at least a few are significant enough to result in changes to the next Top 20 listing. Since we follow the chip industry closely, we thought we’d summarize some of the recent announcements and speculate a bit on what it all means.

The primary catalyst for this post is a recent article in Electronic Engineering Times that listed 16 noteworthy semiconductor deals (or offers) from just the first half of 2015. The article quotes market research firm IC Insights Inc. as totaling the value of these deals at about $72.6 billion, “more than six times the annual average for M&A deals struck during the five previous years.” Please refer to the EE Times article for the complete list; we’re going to mention a few of the biggest deals that may affect the Top 20 listings. First, let’s show the last ten years of results from iSuppli/IHS, including 2014:

You can immediately see changes from 2013 to 2014 based on three older M&A moves : MediaTek acquired MStar while Avago acquired LSI and PLX. The former jumped up five slots while the latter entered the Top 20 for the first time. Of the 16 deals discussed in the EE Times article, four could affect the Top 20 companies for 2015 and beyond. The most obvious is the acquisition of Freescale by NXP for about $11.8 billion. This will combine the number 14 and number 17 semiconductor suppliers to create a company around the size of Broadcom.

Speaking of Broadcom, if all goes as planned it will disappear from the Top 20 list. Avago is continuing its aggressive growth strategy with a $37 billion play for Broadcom. Yes, that means number 15 is acquiring number 8, likely moving into sixth or seventh place. One of the most discussed deals is Intel’s $16.7 billion acquisition of Altera, which won’t change the rankings but may make the biggest vendor bigger. Finally there is the $23 billion bid by China’s Tsinghua Unigroup for Micron. Micron rejected the offer, but if the company is in play then perhaps some other deal will happen.

It’s only been a week since the EE Times article, but the merger mania shows no signs of slowing down. Last week, Mellanox announced a $811 million deal to acquire EZchip. This week, Skyworks announced that it is planning to acquire PMC-Sierra for $2 billion in cash. These are not Top 20 moves, but they show that consolidation of smaller players continues unabated. There is little doubt that there will be more such announcements before the end of this year.

There’s a lot of conventional wisdom about why so much semiconductor M&A activity is happening now. It costs more every year to design a leading-edge chip, and even more to verify it. Bigger players can better absorb these costs. The Internet of Things (IoT) is predicted to drive the sales of massive numbers of inexpensive devices, and economy of scale will help whether building chips or buying them from a foundry. Then there are all the usual business drivers for acquisitions: broader portfolios, product synergy, and better profits margins by cutting “redundant” positions.

These M&A activities are a mixed blessing. Many engineers in the acquired companies worry about loss of local control of technology and loss of jobs. However, acquirers usually value targeted public companies considerably higher than the stock market, so many employees may share the benefit of a good deal. For private companies, acquisition offers an alternative exit strategy to the increasingly rare IPO. Some will win and some will lose, but the trend is highly likely to continue.

Tom A.

The truth is out there … sometimes it’s in a blog.

Tags: Altera, Avago, Breker, Broadcom, chip, EDA, EZchip, Freescale, functional verification, Hynix, IC Insights, IHS, Intel, Internet of Things, IoT, iSuppli, LSI, Marvell, MediaTek, Mellanox, mentor, Micro, Micron, MStar, NVIDIA, NXP, PLX, PMC-Sierra, Qualcomm, Renesas, semiconductor, Skyworks, SoC, SoC verification, Top 20

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