Chipmakers Fuel Record $76 Billion Deal Frenzy as Costs Rise

  • For semiconductor companies, it's `get out or get much bigger'
  • Some of technology's oldest companies may be going away

After decades of standing by as mergers engulfed the rest of the technology industry, chipmakers are embracing dealmaking at a record pace, driven by the need to bulk up as costs surge and their customer base shrinks.

Makers of semiconductors have announced more than $76 billion in mergers and acquisitions this year, the highest annual tally on record. With Fairchild Semiconductor International Inc. seeking possible buyers, Analog Devices Inc. and Maxim Integrated Products Inc. in talks, and SanDisk Corp. hiring a bank to explore a potential sale, that run shows no signs of stopping. Avago Technologies Ltd.’s May agreement to buy Broadcom Corp. was the biggest tech deal ever when it was announced.

Why the urgency? As phones, cars and other electronics become more sophisticated, the costs of designing and producing the pieces that run them are skyrocketing. At the same time, the chip industry’s customer base is shrinking as phone makers such as Apple Inc. and Samsung Electronics Co. increasingly build their own parts and the personal-computer market contracts.

The merger push is coming partly from China, where the government is stepping up acquisitions and other investments -- often in foreign chipmakers. The aim is to find partners and technology that can feed a fledgling domestic semiconductor industry and eventually replace imports.

“Everyone’s looking at the semiconductor industry and saying either we need to get out or we need to get much bigger,” said Gus Richard, an analyst at Northland Capital Markets. “Wherever you look, it’s becoming increasingly difficult to be a chip company.”

Playing Catch-Up

To overcome cost and customer-base challenges, the answer for many chipmakers is to play catch-up to bigger players like Texas Instruments Inc. and Intel Corp. Fairchild, a company founded in the 1950s -- and once the home of executives who later went on to create Intel and Advanced Micro Devices Inc. -- finished last year with about a 10th of Texas Instruments’ revenue. The company has hired Goldman Sachs Group Inc. to help it find a buyer and is in discussions with potential suitors including ON Semiconductor Corp. and Infineon Technologies AG, people familiar with the matter said this week.

Analog Devices, which got its start in 1965, has already made one acquisition this year. The company is in talks with Maxim Integrated Products Inc., people with the knowledge of the matter said. A combination with the 32-year-old Maxim would almost double Analog’s sales, vaulting it to more than a third the size of Texas Instruments by revenue.

Analog Chips

The chips that these companies make, broadly known as analog, have returned to prominence as their customers and the chip industry in general have gotten behind a new growth market, called the Internet of things. By adding connectivity and computing to everyday items, electronics makers are aiming to fire up consumers enough that they’ll upgrade their fridges, air conditioners and cars.

While making a data converter or power controller isn’t as complicated or expensive as building the kind of digital chips that Qualcomm Inc. and Intel make, electronics companies increasingly want combination products that require the building of systems on chips -- a package of semiconductors that can perform multiple functions -- and software.

For the companies that have been able to keep up production of the most advanced chips, the price of doing so continues to rise. A new plant can cost as much as $10 billion to build and equip -- and will be largely obsolete after five years, according to an estimate by Stifel Nicolaus & Co. analyst Patrick Ho. Only five companies in the 30-member Philadelphia Stock Exchange Semiconductor Index had more than $10 billion in revenue for the latest fiscal year, according to data compiled by Bloomberg.

Disappearing Customers

Chipmakers have seen seen their customer lists shorten. Sparked by Hewlett-Packard Co.’s acquisition of Compaq in 2002, the PC industry’s list of providers has grown smaller. International Business Machines Corp. has exited the market, and last year 65 percent of the industry’s revenue was captured by just four companies. In phones, now a bigger market for chips, two companies are dominant: Samsung and Apple account for more than a third of the world’s smartphone market by shipments. Both companies design the main chip in their phones in-house, and Samsung also supplies itself with memory and screens, living leaving little room for other component makers.

Overall, with fewer companies in production and end markets less volatile, the chip industry isn’t experiencing the cycles of boom and bust that it once did. That’s making mergers less risky and providing the chance for companies to acquire others, cut costs, and make the combined entities more profitable, according to Sanford C. Bernstein analyst Stacy Rasgon.

“Most of the deals today are driven by search for scale and cost synergies,” Rasgon said. “In previous cycles it was much more about revenue growth and buying technology.”

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