Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

The chipmaking industry is undergoing its biggest wave of consolidation, and yet Fairchild Semiconductor agreed to sell itself to ON Semiconductor for the industry's lowest Ebitda multiple. No wonder it drew a competing bid. 

If anything, now should be an opportune time to get the highest price possible, while takeovers in the space are hot.

Fairchild Still Cheapest
Acquirers have valued other chip targets at higher Ebitda multiples this year.
Source: Bloomberg
Ebitda estimates taken from day before deals were announced. Transaction values include most recently reported net debt at time of announcement. Stock payment is based on acquirer's 20-day average.

ON's deal, announced Nov. 18, is for $20 a share, or about $2.2 billion when factoring in Fairchild's cash and debt. Another suitor is now offering to pay a slightly higher price of $21.70 a share. While San Jose, California-based Fairchild didn't name the counterbidder, Bloomberg's Alex Sherman and Jonathan Browning reported that it's a group led by China Resources Holdings' semiconductor business and Hua Capital Management. 

The Chinese offer should come as no surprise. A filing last week related to the ON-Fairchild merger discussed a foreign bidding group that included a state-owned enterprise. It was willing to pay $20.20 or more, but it needed more time to finalize the offer. Given the regulatory risks associated with that bidder, Fairchild's board had decided that the proposal from Phoenix-based ON "had a higher certainty of value."

Part of the concern in selling to a Chinese company is that such deals need to be reviewed by the Committee on Foreign Investment in the U.S., an agency that has scuttled transactions involving Chinese SOEs. And even in cases where it hasn't, its probe can delay mergers for months. However, CFIUS did allow Smithfield Foods, a hog and pork producer from Virginia, to be bought by a Chinese firm two years ago in a process that went much more smoothly and quickly than some arbitrageurs had expected.

But here we're talking semiconductors. And Fairchild's products go into things like smartphones and data centers, which are a far touchier subject to the U.S. government than pigs. That said, CFIUS has approved three smaller chip deals involving Chinese parties this year. 

Fairchild said Tuesday that its board and advisers will consider the Chinese proposal. Its bankers will also probably call up ON's bankers and see if ON can match or top it. Based on the chart above, there's room to go higher -- at least if Fairchild warrants a valuation on par with other targets in the industry. And don't forget, Fairchild held discussions with other potential buyers including Infineon Technologies of Germany. (STMicroelectronics also explored a takeover of Fairchild, but its CEO said in October that the Swiss company didn't plan to make an offer.)

Semiconductor M&A Spikes
It's been a blockbuster year, with no signs of slowing down.
Source: Bloomberg
Excludes terminated offers. Transaction values include net debt.

Fairchild wouldn't be the first to set off a bidding war. After PMC-Sierra, a floundering chipmaker, put itself up for sale, analysts weren't even sure it would be able to find a buyer. But then Skyworks Solutions and Microsemi fought over the target. Microsemi won last month, and ended up paying almost 15 percent more than Skyworks first offered when it kicked things off. 

Is Fairchild next? The market's not so sure. The stock traded for $20.55 on Tuesday afternoon, slightly lower than the new bid from the Chinese consortium. To be fair, investors didn't see the PMC-Sierra bidding war coming either. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net