As semiconductor industry matures, M&A deals and talk aboundChipmakers are rushing to find partners or buyers in the busiest year for industry deals since 2011.
Almost $11 billion in North American semiconductor transactions were announced in the first half of 2014. At least a dozen more chipmakers have had merger discussions, according to people familiar with the companies’ plans. Targets could include Monolithic Power Systems and Power Integrations, whose outsourced manufacturing would make them easy to fold into another company, according to Raymond James Financial.
With earnings becoming more consistent and expenses declining, semiconductor companies have seen cash reserves swell and may now have a chance to spend that money on deals, according to Nomura Holdings, which also said stock rallies that follow deal announcements are incentives for more chipmakers to consider their options. Bigger companies such as Intel and Qualcomm also are being pressured to use their cash after years of it being parked overseas, making them potential buyers, according to Sterne Agee Group.
“The market’s responded quite positively,” says Romit Shah, an analyst at Nomura. “That’s giving these management teams, who are generally conservative about M&As, the courage to go forward.”
A maturing of the semiconductor industry is pushing companies to turn to larger acquisitions for expansion, says Steve Smigie, an analyst at Raymond James. Total semiconductor revenue has increased at an average rate of 5 percent a year since 2010, less than half the rate over the preceding 10 years.
Slower growth has meant less volatility in profits, reducing the need to hold onto cash. In the past, wide swings in supply and demand strained earnings, forcing chipmakers to keep extra cash on hand. Many semiconductor companies, which previously spent billions of dollars to build plants that became largely obsolete within a few years, now outsource their production.
The industry’s three largest companies - Intel, Qualcomm and Samsung Electronics - have more than $100 billion in cash and equivalents, more than 80 percent higher than the amount in 2010.
“If they do an accretive acquisition, it makes sense,” says Vijay Rakesh, an analyst for Sterne Agee. “Investors like this use of cash.”
Acquirers have been rewarded for doing deals. Shares of RF Micro Devices climbed 21 percent on Feb. 24, the day it said it was buying TriQuint Semiconductor. When Analog Devices, a maker of semiconductors used in wireless-phone systems, announced on June 9 it would acquire Hittite Microwave and the stock rallied 5 percent, the biggest one-day gain in more than two years.
The transaction, by which Analog Devices gains a company with better growth prospects, may serve as a model for purchases of other chipmakers.
“We’re going to see more mergers of equals,” says Doug Freedman, an analyst at RBC Capital Markets, a unit of Royal Bank of Canada. “There are a lot of deals being talked about.”
Monolithic Power, which makes chips for cars and battery chargers, and Power Integrations, a maker of chips that help convert and regulate power in electronics, may lure takeover interest with their strong profitability and growth prospects, says Smigie of Raymond James.
Gross margins at both companies exceed the median for similar-sized peers, and their sales are projected by analysts to grow at least 19 percent over the next two years. Both are valued at less than $2 billion.
“If you look at the fact that the industry overall is maturing, in order to get growth, I think acquisitions have got to start to become a more important part of your strategy,” says Smigie. “Monolithic Power and Power Integrations have generally demonstrated fairly strong growth and so that makes them attractive.”
Both companies are fabless chipmakers, meaning they outsource their manufacturing operations. That allows them to adjust designs and production more quickly without the overhead of running their own plants. It also makes them easier to integrate into a company that has its own manufacturing capabilities or that wants to maintain an outsourcing model, he says.
Other takeover possibilities in the industry include Semtech and M/A-Com Technology Solutions Holdings, the analyst said. Semtech is valued at $1.8 billion and M/A-Com at $1.1 billion. Nomura’s Shah, who correctly predicted that Hittite was a takeover target for Analog Devices, also lists M/A-Com, Semtech and Monolithic among 15 acquisition candidates.
Fairchild Semiconductor International, one of the oldest companies in the industry after being established in 1957, may be a target, says Chris Rolland, an analyst for FBR & Company in New York.
Companies such as Texas Instruments, which has excess capacity in its plants, may look to buy smaller rivals like Atmel to bring their orders in-house and improve operational efficiency, he says, adding that any analog chipmaker that joins Texas Instruments would in turn benefit from its sales force, the largest in the industry.
“The semiconductor industry is an industry of scale,” says Rolland. “You don’t need a full sales force for a $1 billion company. You could easily leverage TI’s sales force.”
Shares of Power Integrations climbed 0.96 percent to $59.30 in New York yesterday. M/A-Com rose 0.44 percent to $22.90, Fairchild rallied 0.96 percent to $15.79 and Monolithic increased 1.46 percent to $43.10. Atmel rose 0.32 to $9.51, while Semtech rose 1.14 percent to $26.73.
The Philadelphia Semiconductor Index has climbed 21 percent this year, leaving it trading at 21 times earnings, more than the Standard & Poor’s 500 Index’s multiplier of 18.
Still, those valuations haven’t deterred purchasers. In the first six months of the year, semiconductor companies in North America reported $10.6 billion in transactions, the busiest first half since 2011 when the figure was $16.1 billion.
with the Korea JoongAng Daily
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