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Intel’s Deal Ambition Ramps Up Chipmaker Consolidation: Real M&A

Intel Corp.’s pursuit of its biggest acquisition yet only builds the case for more semiconductor deals.

The world’s largest chipmaker is in talks to buy Altera Corp. and add to what is already the strongest start on record for takeovers in the industry. Investors rewarded Intel with an intraday gain on Friday that was the biggest in six years. The $150 billion company’s foray into the buyers’ circle may give other semiconductor makers facing lackluster growth more incentive to make acquisitions of their own.

Texas Instruments Inc., the biggest maker of analog semiconductors, is notable for its absence from the M&A flurry. The $60 billion company’s last takeover of size was in 2011. Atmel Corp., Silicon Laboratories Inc. and Microchip Technology Inc. are among potential targets still standing. Each one offers a steady business with ample cost-cutting opportunities as part of a larger company, said Ian Ing of MKM Partners.

“There’s absolutely more to come,” Gavin Slader, a managing director in the investment-banking group at JMP Securities who focuses on the tech industry, said in a phone interview. “I would almost say anyone who hasn’t done a deal at this point has either got to be thinking about selling themselves or being acquisitive.”

Even Broadcom Corp., with a market value of $26 billion, could draw takeover interest, said Romit Shah of Nomura Holdings Inc.

A representative for Irvine, California-based Broadcom declined to comment, while representatives for Austin, Texas-based Silicon Labs, San Jose, California-based Atmel and Chandler, Arizona-based Microchip Technology said their companies don’t comment on speculation.

Coming Together

Altera has an enterprise value of about $10.5 billion after the news of a potential sale sent its stock soaring. A takeover would be the second-biggest of the year, coming after NXP Semiconductors NV’s bid for Freescale Semiconductor Ltd., which was valued at about $16.7 billion including debt when it was announced earlier this month.

There were $19.5 billion in semiconductor deals in 2014 -- a three-year high -- and volume in 2015 has already almost surpassed that.

“There is no doubt that things are consolidating and consolidating fairly quickly,” Chris Rolland, a New York-based analyst at FBR & Co., said in a phone interview. He estimates that 10 percent or more of the publicly traded U.S. semiconductor companies could be acquired this year.

Deal Drivers

One of the main drivers of consolidation is economies of scale as companies seek to stay competitive by cutting costs and improving factory utilization. Another is the need to jolt sales growth back to life as the chipmaking industry matures.

Intel is set to report a 0.4 percent drop in revenue in 2015, its third decline in four years. Buying Altera would augment Intel’s dominant position in data centers and help the Santa Clara, California-based company expand in industries such as communications infrastructure and industrial applications, Pacific Crest Securities analysts led by Michael McConnell wrote in a report Sunday.

“For a company like Intel, which is primarily tied to PCs, which really isn’t growing, they’ve got to figure out a way to diversify and extend their presence in areas like the data center where there is good growth,” Shah of Nomura said. “I would imagine that other companies like Qualcomm are probably thinking about the same thing.”

Buying Power

Qualcomm Inc. agreed to buy U.K. chipmaker CSR Plc for about $2.5 billion in October, but like Texas Instruments, it hasn’t been making as many acquisitions as it could, Shah said. Another company that’s largely sat out of the recent deal flurry so far and could make an acquisition is Skyworks Solutions Inc., said Ing of MKM Partners.

A representative for Dallas-based Texas Instruments said the company doesn’t comment on M&A speculation, and a representative for San Diego-based Qualcomm also declined to comment. Representatives for Intel and Woburn, Massachusetts-based Skyworks didn’t respond to requests for comment.

Bigger Targets

More takeovers mean fewer available targets, and that could move big companies such as Broadcom further up on acquirers’ shopping lists. Broadcom’s enterprise value of $22 billion is about 13 times its free cash flow in the last year, a lower multiple than most other similar-sized U.S. chipmakers, according to data compiled by Bloomberg.

Intel could be interested and will still have capacity for an acquisition like that even if it completes a takeover of Altera, according to FBR’s Rolland said.

“You would lock up not only the compute side but also the networking side of the data center and you would be an absolute power house,” Rolland said.

A potential deal between Intel and Altera could spur other semiconductor companies to accelerate their data strategies, according to Woo Jin Ho and Anand Srinivasan of Bloomberg Intelligence. One possible target is San Jose-based Xilinx Inc., a company with an $11 billion market value that’s similar to Altera, said McConnell of Pacific Crest. A representative for Xilinx didn’t respond to a request for comment.

For those companies with market values below $5 billion that are still autonomous, the challenges of being smaller are only going to become more burdensome. Atmel, at $3.4 billion, is Rolland’s top pick for the industry’s next takeover target because it’s subscale, has low growth and could benefit from being part of a bigger company.

“You’re going to see a lot of these smaller, and by that I mean $1.5 billion to $1 billion semi companies, start to really need to think long and hard,” Slader of JMP Securities said. “Does it make sense to stay independent or does it make sense to look at a strategic exit?”

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