China’s Desire for Chip Independence Fueled ISSI Bidding War

Uphill Investment Co.’s deal to acquire Integrated Silicon Solution Inc. after a six-week bidding war with Cypress Semiconductor Corp. shows how determined China is to build up its own semiconductor industry.

ISSI’s shareholders on Monday approved the China-backed fund’s $731 million offer, ending more than a month of opposing bids. San Jose, California-based Cypress said last week that its best and final proposal was $22.60 a share, shy of Uphill’s $23-a-share offer.

The deal, which remains subject to U.S. regulatory approval, is the latest example of China’s desire to shed its reliance on overseas technology. ISSI has annual sales of less than $350 million, placing the Milpitas, California-based company well down the ranks of global suppliers. The pursuit of the company, however, reflects a broader competition to add expertise in the $300 billion industry.

“It’s a long-term game plan,” said Betsy Van Hees, an analyst at Wedbush Securities. “While I don’t see this as being an immediate threat, it is something that in 10 years could be a big challenge for chip companies in the U.S. and Europe.”

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China accounts for more than half of the global semiconductor industry’s sales and is growing faster than other markets, according to PricewaterhouseCoopers. Yet the country doesn’t have one manufacturer in the 10 biggest producers worldwide -- a list still stacked with U.S. companies. China’s demand gives it the heft and incentive to boost homegrown production, which currently provides less than 10 percent of local companies’ needs, according to an estimate by Sanford C. Bernstein.

Semiconductors are included in an industry category that is among seven given priority in China’s most recent Five-Year Plan, with the aim of increasing their contribution to gross domestic product to 8 percent by 2015 from 2 percent. Beijing has budgeted as much as 1 trillion yuan ($160 billion) for spending on the chip industry over the next five to ten years, according to a report last summer by consulting firm McKinsey & Co.

“There have been several attempts over the last few years, but this one seems to be a little bit more long-lived,” said Anand Srinivasan, an analyst at Bloomberg Intelligence.

Uphill’s deal with ISSI comes in a record year for semiconductor deals generally in response to rising costs and a more concentrated customer base.

Other Deals

In the last two years, Tsinghua Unigroup Ltd., an affiliate of one of China’s top technology universities, acquired Spreadtrum Communications Group. for $1.5 billion and RDA Microelectronics Inc. for $893 million. The purchases brought two mobile-phone chip designers under one roof, the first step toward possibly creating a viable local supplier of chips that Chinese handset makers get from U.S.-based Qualcomm Inc. or Taiwan-based MediaTek Inc.

Also, state-backed entities have agreed to buy OmniVision Technologies Inc., which makes camera sensors that have been used in iPhones. Semiconductor Manufacturing International Corp., China’s largest chipmaker, has entered into a joint venture with Qualcomm.

For Cypress, losing out to the Chinese government may not be the worst result, as there may have been other consequences if it had won in a market where it gets a quarter of its sales.

“Even if you win, you could lose,” said Craig Ellis, a analyst for B. Riley & Co.

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