Laying Off the Chips

After record M&A, there are fewer targets and tighter financing conditions.

After a two-year binge on takeovers, computer-chip makers are curbing their appetites. Even the bidding wars are getting less exciting.

On Wednesday, a contest for semiconductor maker Atmel escalated when it said an unsolicited bid it got from Microchip Technology is superior to a previously-agreed-to proposal from Dialog Semiconductor. The catch? Microchip, which had emerged as a counter-bidder for Atmel last month, is now offering less than it had originally proposed. It's as strong a signal as any that the wave of deal-making in the industry may be cresting.

Slow Start

Semiconductor deal activity so far this year has barely registered.

Source: Bloomberg

It was bound to happen. Semiconductor makers have already announced $120 billion in takeovers over the last two years in the industry's biggest spending spree. All that activity means there just aren’t that many targets left. Those that are still independent are probably that way for a reason.

Microchip, in fact, considered abandoning its pursuit of Atmel after the target struggled in the fourth quarter. The chipmaker has been having a hard go of things for years now and is certainly not the kind of thing you want to go hog wild for in a bidding war. On the other end of the spectrum, Texas Instruments and Analog Devices bailed on a purchase of Maxim Integrated Products after neither could reach an agreement with the company on price, people familiar with the matter told Bloomberg's Alex Sherman. Maxim is among the more expensive chipmakers out there and is doing just fine on its own. And Qualcomm, a company investors have been expecting to do a deal, instead announced a radio-chip joint venture this week with Japan's TDK.

Those companies that do find targets may have a harder time getting deals done. The Federal Reserve's decision to raise interest rates, coupled with an onslaught of takeover-related issuance and investor concerns about a global slowdown, portend higher borrowing costs for many would-be acquirers, especially high-yield issuers. Average yields for speculative-grade U.S. technology companies have already risen to 8.44 percent, compared with 6.54 percent as recently as April. And credit markets could continue to tighten.

Losing Luster

Borrowing costs for high-yield technology issuers have surged to highest in more than three years.

Source: Bloomberg

It's already happening for Microsemi. The semiconductor maker in November bested Skyworks Solutions in a hard-fought (and quite expensive) bidding war for PMC-Sierra. This month, Microsemi issued $450 million of speculative-grade debt to help fund its purchase. As Bloomberg Intelligence has noted, a 9.125 percent yield on that offering pushed the blended yield for the deal's debt package to 5.4 percent. That's at least 20 percent more than the borrowing costs Microsemi had targeted when it first began its pursuit of PMC-Sierra.

The higher financing costs on top of what was already an expensive price tag should be warning signals for other buyers. Indeed, Microsemi has slid more than 10 percent since securing the deal with PMC-Sierra. That's a change from the early days of the semiconductor M&A boom when acquirers' stocks soared on the prospect of massive cost savings.  

That's not to say chipmaker takeovers are dead. The reasons for the deal surge of the past few years are well-documented: rising costs tied to ever-more complex chips and growing competition as customers such as Apple and Samsung increasingly develop their own products. With even Amazon getting in on the semiconductor game these days, those pressures still exist and will continue to drive some M&A in 2016. 

There are still a few attractive targets left, including Xilinx, whose rival Altera was purchased by Intel for about $14 billion last year. With a market value of $11 billion, Xilinx would be a decent-sized purchase for the likes of Qualcomm. Lattice Semiconductor or Cavium, valued at about $550 million and $3.2 billion, respectively, are some other possibilities.

Most deals will be smaller, easy to fund and easy to digest, though. The other semiconductor bidding war of 2016 -- a back and forth for Anadigics -- is for less than $100 million. The year is young, but that's a pretty good harbinger for what's to come.

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

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    Brooke Sutherland in New York at

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    Beth Williams at

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