Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

China is getting closer to clinching its biggest purchase of an overseas chipmaker, after Fairchild Semiconductor said a revised takeover proposal from China Resources Holdings and Hua Capital Management can reasonably be expected to lead to a superior offer.

The statement clears the way for talks between the two groups, with the $2.46 billion bid from state-owned China Resources now looking set to trump a $2.4 billion offer from ON Semiconductor to which Fairchild agreed in November.

If successful and approved by the U.S. government (and barring a higher offer from ON), the takeover would mark the latest in a series of deals where Chinese buyers have paid a premium to acquire assets at the lower-tech end of the chipmaking spectrum. The country's drive to create a national chipmaking champion has propelled acquisitions to a record:

Chip Frenzy
China's acquisitions of overseas semiconductor makers $b
Bloomberg
*2015 data excludes failed $23 billion bid for Micron Technology

Fairchild, a Silicon Valley pioneer founded more than half a century ago, makes chips that regulate power use in computers, cars and phones. Acquiring such a storied name would give China prestige, but at a price. China Resources' $21.70-a-share bid values Fairchild at 16 times earnings, based on its trailing Ebitda to enterprise value. The median for comparable deals is 9.6, according to data compiled by Bloomberg. That's quite a premium for a company that has struggled to increase sales. Fairchild's revenue in the most recent 12 months was lower than in 2006.

Price hasn't dimmed China's appetite. The nation's semiconductor deals totaled $5.46 billion last year -- almost 80 percent more than the $3 billion registered in 2014 and up from nothing in 2013. The buying spree shows how a country that purchases more than half the world's semiconductors every year is no longer content to be simply an assembler for other countries' hardware and is pushing to move up the value chain.

There remains one hole in China's semiconductor strategy, though: memory. These are the most commoditized chips, used in smartphones, computers and other devices.

In July, the state-backed private equity arm of one of the country's top colleges, Tsinghua University, pulled out of a $23 billion bid for memory-chip maker Micron Technology, following signs that the U.S. government was unlikely to approve the deal on security grounds.

Tsinghua Unigroup instead forked out $3.78 billion for 15 percent of disk-drive maker Western Digital, which in turn went on to make a $17.7 billion offer for rival SanDisk. Unigroup also had a bid to buy a minority stake in South Korea's SK Hynix rebuffed in November, Reuters reported.

Having had approaches for two of the world's top three memory-chip makers rejected (the No. 1, South Korea's Samsung Electronics, is clearly out of reach), it's no wonder that Tsinghua said in November that it plans to build its own memory-chip plant.

In the past five years, China has offered an average premium of 60 percent to enterprise value for semiconductor takeovers, compared with a average of 18 percent for other acquirers globally.

Paying for Chips
Premiums, in percentage terms, paid by Chinese vs global acquirers for overseas semiconductor assets

China may be better off holding on and waiting, rather than rushing in and paying top dollar. While coveted memory-chip targets remain out of reach, the sector as a whole is in the midst of its biggest-ever consolidation, with about $110 billion in deals last year as slowing growth and rising costs drive companies in search of partners.

Waiting could also sway potential sellers, though security concerns will remain a hurdle, at least in the case of U.S. technology assets. Among the country's top decliners last year? Micron, whose stock tumbled 60 percent and is now worth just $15 billion.

Waiting Game?
Micron shares have continued to languish since the failed Chinese bid
Bloomberg

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

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net