The wave of consolidation that has run rampant in the semiconductor industry for more than a year has reached new heights as buyers scramble to land a shrinking number of potential acquisition targets.
Case in point: Microsemi Corp.’s agreement last week to acquire mixed-signal storage IC house PMC-Sierra Inc. for $2.5 billion in cash and stock. The purchase price is a full 25% higher than the $2 billion that Skyworks Solutions Inc. agreed to pay for PMC less than two months earlier. It is also 77% higher than the closing price of PMC’s stock on Sept. 30, a few days before the Skyworks deal was announced.
Mergers and acquisitions have been part of the semiconductor industry’s DNA from the get go. But, even in and acquisition-happy industry, 2015 has been an extraordinary year by any measure. The total value of semiconductor industry acquisitions announced this year now stands at a little over $102 billion, more than eight times the average annual value of acquisitions by semiconductor companies over the past five years, according to market research firm IC Insights Inc.
Faced with an industry that is growing far too slowly to satisfy Wall Street, chip companies have no choice but to dig deep to fund acquisitions as a way to grow revenue and scale.
“It all comes back to the pressure these companies are facing in trying to grow their sales faster than the [semiconductor] market is growing,” said Rob Lineback, a senior market research analyst at IC Insights.
Kevin Cassidy, managing director of the semiconductors practice at investment banking company Stifel Financial Corp., said the annual growth rate of the semiconductor is roughly 5% to 7%, not enough to offset annual engineering labor cost increases. “If you aren’t in markets that are growing faster than that, you aren’t getting any leverage. You aren’t bringing increased income to the investors,” Cassidy said.
But Cassidy—who couldn’t comment specifically on the Microsemi deal to buy PMC-Sierra because Stifel is acting as a financial advisor to Microsemi on the transaction—said that despite the flurry of M&A activity and the bidding wars that have been unfolding, the valuations of the companies being acquired haven’t gotten out of whack…yet. As the wave of consolidation continues, though, Cassidy and other analysts predict that the valuations of the acquired companies will balloon.
Part of the reason that valuations are bound to get excessive is a matter of inventory. There simply aren’t that many semiconductor firms for sale, and as more of them get snapped up, the pool of candidates shrinks. It’s a seller’s market.
“It really comes down to the fact that the candidates that are out there that are worth buying are limited,” Lineback said. He added that while some companies have no interest in being acquired, those that do signal that they are available can start bidding wars simply by hanging out the “For Sale” sign.
Lineback added that a few years ago, semiconductor companies were determined to get leaner and more focused. They were selling or killing off product lines, pulling back from markets were they weren’t a major player, and putting all of their resources into a handful of markets where they could command significant market share.
Today, however, they all seem to get more broadly focused, adding product lines and entering new markets through acquisition.
“I think that’s kind of the evolution of an industry,” Cassidy said.
“A few years ago, maybe you wanted to focus on handsets because handsets were growing 20 to 25% per year and if you took your eye off that ball you’d missing a great market,” Cassidy said. “But now handsets are only growing 5 to 10% per year, so you need to go find growth somewhere else.”
One thing that virtually everyone agrees on is that the wave of consolidation has yet to run its course. There will be more blockbuster deals.
”Until there is growth in the market, there has to be consolidation,” Cassidy said.
—Dylan McGrath covers the semiconductor industry for EE Times.
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more like an avalanche that takes time to setup but once primed needs a trigger to set it off. all large companies need to be on the offensive and defensive outlook.