Chipmakers’ Cash Sparks Most Deals Since 2011: Real M&AIan King, Brooke Sutherland and Alex Sherman
Chipmakers are rushing to find partners or buyers in the busiest year for industry deals since 2011.
Almost $11 billion in North American semiconductor transactions were announced in the first half of 2014, according to data compiled by Bloomberg. At least a dozen more chipmakers have had merger discussions this year, according to people familiar with the companies’ plans. Targets could include Monolithic Power Systems Inc. and Power Integrations Inc., whose outsourced manufacturing would make them easy to fold into another company, Raymond James Financial Inc. said.
With earnings becoming more consistent and expenses declining, semiconductor companies have seen cash reserves swell and may now have a chance to spend that money on deals, according to Nomura Holdings Inc., which also said stock rallies that follow deal announcements are incentives for more chipmakers to consider their options. Bigger companies such as Intel Corp. and Qualcomm Inc. are also being pressured to use their cash after years of it being parked overseas, making them potential buyers, Sterne Agee Group Inc. said.
“The market’s responded quite positively,” Romit Shah, an analyst at Nomura, said in a phone interview. “That’s giving these management teams, who are generally conservative about M&A, the courage to go forward.”
A maturing of the semiconductor industry is pushing companies to turn to larger acquisitions for expansion, said Steve Smigie, an analyst at Raymond James. Total semiconductor revenue has increased at an average rate of 5 percent a year since 2010, less than half the rate over the preceding 10 years, according to data compiled by Bloomberg Industries.
Slower growth has also meant less volatility in profits, reducing the need to hold onto cash. In the past, wide swings in supply and demand have strained earnings, forcing chipmakers to keep extra cash on hand. Many semiconductor companies, which had previously spent billions of dollars to build plants that became largely obsolete within a few years, are now outsourcing their production.
The industry’s three largest companies, Intel, Qualcomm and Samsung Electronics Co., now have more than $100 billion in cash and equivalents, more than 80 percent higher than the amount in 2010, according to data compiled by Bloomberg.
“If they do an accretive acquisition, it makes sense,” Vijay Rakesh, an analyst for Sterne Agee, said in a phone interview. “Investors like this use of cash.”
Acquirers have been rewarded for doing deals. Shares of RF Micro Devices Inc. climbed 21 percent on Feb. 24, the day it said it was buying TriQuint Semiconductor Inc. When Analog Devices Inc., a maker of semiconductors used in wireless-phone systems, announced on June 9 that it would acquire Hittite Microwave Corp., the stock rallied 5 percent, the biggest one-day gain in more than two years.
The transaction, by which Analog Devices gains a company with better growth prospects, may serve as a model for purchases of other chipmakers.
“We’re going to see more mergers of equals,” Doug Freedman, an analyst at RBC Capital Markets, a unit of Royal Bank of Canada, said in a phone interview. “There are a lot of deals being talked about.”
Monolithic Power, which makes chips for cars and battery chargers, and Power Integrations, a maker of chips that help convert and regulate power in electronics, may lure takeover interest with their strong profitability and growth prospects, said Smigie of Raymond James. Gross margins at both companies exceed the median for similar-sized peers, and their sales are projected by analysts to grow at least 19 percent over the next two years. Both are valued at less than $2 billion.
“If you look at the fact that the industry overall is maturing, in order to get growth, I think acquisitions have got to start to become a more important part of your strategy,” Smigie said in a phone interview. “Monolithic Power and Power Integrations have generally demonstrated fairly strong growth and so that makes them attractive.”
Both companies are fabless chipmakers, meaning they outsource their manufacturing operations. That allows them to adjust designs and production more quickly without the overhead of running their own plants. It also makes them easier to be integrated into a company that has its own manufacturing capabilities or that wants to maintain an outsourcing model, Smigie said.
Other takeover possibilities in the industry include Semtech Corp. and M/A-Com Technology Solutions Holdings Inc., the analyst said. Semtech is valued at about $1.8 billion and M/A-Com at $1.1 billion. Nomura’s Shah, who correctly predicted that Hittite was a takeover target for Analog Devices, also said M/A-Com, Semtech and Monolithic were among 15 acquisition candidates.
Fairchild Semiconductor International Inc., one of the oldest companies in the industry after being established in 1957, may be a target, said Chris Rolland, an analyst for FBR & Co. in New York.
Companies such as Texas Instruments Inc., which has excess capacity in its plants, may look to buy smaller rivals such as Atmel Corp. to bring their orders in house and improve operational efficiency, he said. Any analog chipmaker that joins Texas Instruments would in turn benefit from its sales force, the largest in the industry, he said.
“The semiconductor industry is an industry of scale,” Rolland said in a phone interview. “You don’t need a full sales force for a $1 billion company. You could easily leverage TI’s sales force.”
Shares of Power Integrations climbed 0.9 percent to $59.27 today. M/A-Com rose 0.4 percent to $22.91, Fairchild rallied 1 percent to $15.79, and Monolithic increased 1.5 percent to $43.10, reaching an all-time high. Atmel rose 0.3 percent to $9.51, while Semtech jumped 1.1 percent to $26.73.
Representatives for Power Integrations, M/A-Com, Fairchild and Atmel declined to comment. Representatives for Semtech and Monolithic didn’t respond to requests for comment.
The Philadelphia Semiconductor Index has climbed 21 percent this year, leaving it trading at 21 times earnings, more than the Standard & Poor’s 500 Index’s multiple at 18, according to data compiled by Bloomberg.
Still, those valuations haven’t deterred purchasers. In the first six months of the year, semiconductor companies in North America reported $10.6 billion in transactions, the busiest first half since 2011 when the figure was $16.1 billion, data compiled by Bloomberg show.
Dealmaking across the industry is poised to continue as companies hunt for growth and seek to benefit from stock price increases tied to accretive deals, said Smigie of Raymond James.
“If you’re not out buying stuff and your competitors are, you could be at a disadvantage,” he said. “With potentially fewer companies out there, you have to start to act quickly.”