Semiconductor M and A Report - March 2016 · The first of these were Texas Instruments' $8.0...
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Silicon Valley London © 2016 Woodside Capital Partners March 2016 SEMICONDUCTOR M&A The Beginning of the End, or the End of the Beginning? Investment Banking Greg Mischou Kirk Bloede Senior Partner Managing Director
Transcript of Semiconductor M and A Report - March 2016 · The first of these were Texas Instruments' $8.0...
SiliconValleyLondon
©2016WoodsideCapitalPartners
March2016
SEMICONDUCTORM&A
TheBeginningoftheEnd,ortheEndoftheBeginning?
Investment Banking
Greg Mischou Kirk Bloede
Senior Partner Managing Director
SiliconValleyLondon
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ContentsExecutiveSummary.....................................................................................................................................3
SemiconductorM&A–2015WasDifferent................................................................................................5
DealSynergies–AmbitiousGoalsforExpenseReduction....................................................................10
Semiconductors–ACaseforaMaturingIndustry....................................................................................12
CouldtheInternetofThingsturntheTide?..............................................................................................14
China..........................................................................................................................................................16
CFIUS–TheProverbial“FlyintheOintment”...........................................................................................21
NotableSemiconductorM&ATransactions..............................................................................................21
Conclusion.................................................................................................................................................24
CompanyProfiles.......................................................................................................................................25
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ExecutiveSummaryIn2015,wewitnessedaremarkablenumberofverylargeM&Atransactionsamongsemiconductorcompanies.WhilethesemiconductorindustryhasaggressivelyreinventeditselfthroughM&Aovertheyears,thislevelofactivityisdifferent,andreallytransformative.Mergersandacquisitionstypicallyoccurinreactiontocompetitiveormarketconditions,andwebelievethatisalsothecasehere.Inthisreport,wetakealookatsomeofthefactorsmotivatingtheflurryofdeals,andalsolookatwhatwecanexpectgoingforward.
Inadditiontotheforcespresentinanymaturingindustry,therearesomespecialelementsthatcomeintoplayinthesemiconductorspace.Inparticular,Moore’sLaw,thedefiningalgorithmforprocessimprovementandevolvingprice/performanceforover30yearsintheindustry,isbreakingdownasthelimitsofthelawsofphysicsbecomeincreasinglyinsurmountable.Attheverysametime,growthinthepersonalcomputermarkethassloweddramatically,displacedbymobilecomputingdevices,changingthedynamicsandeconomicsofthesemiconductorcomponentsusedinthesedevices.Moreover,venturecapitalfundinghasshiftedalmostentirelyawayfromsemiconductortechnologiesandintosoftwareandrelatedtechnologies.
Finally,thereisChina.Inadditiontoagrowingmiddleclasswithincreasingpurchasingpowerforallofthegadgetsanddevicesthatcontainsemiconductorcomponents,theChinesegovernmentisalsointentlyfocusedondevelopingitsindigenoussemiconductormanufacturingcapability.InJune2014theChinesegovernmentissuedguidelineswhichessentiallylaidoutanambitiousplanforbecominga“globalleaderinallprimarysegmentsoftheICindustrysupplychain.”Aspartofthisoverallstrategy,thegovernmentlaterannouncedthatitexpectstoinvestasmuchasRMB$1trillion(approximately$150billionatcurrentrates)overthenext10yearsinsupportofthesegoals.
WhiletheChinesegovernmenthasannouncedambitiousdevelopmentgoalsforitssemiconductorindustryinthepast,thisislargerinscaleandrepresentsthefirsttimethegovernmenthassetupfundsthatareintendedtoinvestjointlywithpublicinvestorsandhasaskedprofessionalfundmanagementcompaniestoraise,invest,andmanagethefunds,asopposedtodirectlyinvestingorsubsidizingspecificentities.Moreover,inthisinitiativetheChinesegovernmentappearsto
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befocusingonspecificnationalchampionsindifferentsegments,suggestingamorefocusedandconcentratedapproach.
Overall,andnotwithstandingtheobstaclesposedbyCommitteeonForeignInvestmentintheUS(CFIUS)regulations,whichhavederailedmorethanonerecentlyannouncedtransaction(discussedinmoredetailintheChinasection,below),webelieveChinawillcontinuetogrowitssemiconductorcapabilitiesandmarketsharefasterthantheworldwideaverage,boththroughacquisitionandthroughorganicgrowth,likelyputtingpressureonmarginsfortheexistingplayers.
Moregenerally,weseeM&Aactivitycontinuingataheightenedlevel,withthepotentialforafewmorelargetransactionsasconsolidationcontinues.Perhapsmoreimportanthowever,istheneedtorationalizeanddigesttheacquisitionsthathavealreadyoccurred.Asacquirorsadapttochangingmarketconditionsandattempttoenhancetheirfocusonsegmentswheretheyalreadyenjoysignificantcompetitiveadvantage,theywillinevitablyidentifynon-corebusinessesthattheywillwanttodivest,andwebelievethiswillcontributetotransactionvolumeinthenext12-18months.
Youcanreachusat:
InvestmentBanking [email protected]
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SemiconductorM&A–2015WasDifferent
ReviewingsemiconductorM&Aandfundingactivityoverthepasteightyearsrevealstwoclearphases.From2008through2012therewasamuchhighernumberoftransactions,butthetransactionswerecomparativelysmall,onaverage.Thisperiodwasdrivenbyadramaticcontractionofventurefundingintosemiconductorcompanies,asthefocusofventurecapitalistsshiftedtowardfundingsoftwareandinternetratherthanhardwareorsemiconductors.DuringthisperiodmanyofthelargersemiconductorcompaniestookadvantageoftheopportunitytoselectivelyacquireprivatelyheldventurebackedcompaniesthathaddevelopedcompellingIPandproducts,butfoundthemselvesunabletoraisethecapitalrequiredfornewmarketentryorexpansionfromeitherthepublicorprivatecapitalmarkets.Thislackofcapitalinturnhinderedtheirabilitytogaindesignwinsfromprospectivecustomersconcernedaboutthecompanies'abilitytosurviveandsupportthetechnologythroughanentireproductlifecycle.Atthesametime,larger,moreestablishedsemiconductorcompanieswereable,throughacquisition,toleveragetheirexistingsaleschannelsanddrivesignificantrevenuegrowth.By2013,fundingforprivatesemiconductorcompanieshadprettymuchdriedupforallbutafewexceptionswithannualfundingfallingsignificantlybelow$1billion(vs.$2billionin2008).(SeeFig.1andFig.2,below)
M&AHasAlwaysBeenaPartofStrategy
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Figure1:SemiconductorConsolidationofHistoricProportions
Figure2:FundingforRolling12-monthperiod(JantoDec)
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Inthechartbelow,wecanclearlyseethedeclineinventurefunding.Overthepast7years,SeriesAfundingshavedeclinedfroma2010peakof$92.3milliontolastyear’slowof$8million,withacorrespondingdeclineinthenumberofannounceddealsfromapeakof11(2008)toonly2lastyear.WenotethatwithoutSeriesAfundingstherecanbenoSeriesB,CorD,orpublicofferings.Whilesomeofthegapmaybefilledbyangelsorcorporatesponsorships,aswewillsee,pressuresontheremainingcorporateplayerssuggestthatless,ratherthanmoreR&Dspendingislikelyintheyearstocome,callingintoquestionthelevelofcorporatefinancialsupportforearlystageinnovators,andraisingarealconcernaboutcapitalformationandinnovationinthisimportantindustrysegment.
Figure3:SeriesAFundingforRolling12-monthperiod
Around2011webegintoseethesecondphaseemerge,characterizedbyanincreasingnumberofmega-deals.ThefirstofthesewereTexasInstruments'$8.0billionacquisitionofNationalSemiconductor,Qualcomm’s$3.6billionacquisitionofAtheros,andBroadcom’s$3.7billionacquisitionofNetLogic.Thiswasfollowedin2013byAvago's$6.6billionacquisitionofLSILogic.In2014themomentumcontinuedwithAnalogDevices'$2.4BillionacquisitionofHittiteMicrowave,Infineon's$3.0billionacquisitionofInternationalRectifier,Qualcomm's$2.4billionacquisitionofCSR,andCypressSemiconductor's$2.2billionacquisitionofSpansion.
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In2015,semiconductorM&Aactivityexplodes,exceeding$110billion,whichisgreaterthantheprevious7yearscombined.Thisincluded10dealsannouncedthathadatransactionvaluegreaterthan$1billion.Notably,2015alsoincludedthreeofthelargestoveralltechdealsofthelast10years:Avago's$37billionacquisitionofBroadcom,WesternDigital's$20billionacquisitionofSanDisk,andIntel's$18billionacquisitionofAltera.
Figure4:SelectedMajorM&ATransactionsintheSemiconductorIndustry2011-2016
AnnouncedDate ClosedDate Buyer TargetTotalTransaction
Value($M)* EV/Rev(x) EV/EBITDA(x)01/13/2016 Pending MicrochipTechnology Atmel $3,492 2.8x 25.4x
12/14/2015 Pending MicronSemiconductor InoteraMemories $4,227 2.4 3.7
12/08/2015 Cancelled ChinaResources(Holdings) FairchildSemiconductor $2,659 1.7 11.5
11/18/2015 Pending OnSemiconductor FairchildSemiconductor $2,596 1.7 11.2
10/21/2015 Pending WesternDigital SanDisk $19,971 3.2 12.4
10/19/2015 01/14/2016 Microsemi PMC-Sierra $1,921 4.2 24.4
09/20/2015 Cancelled DialogSemiconductor Atmel $4,446 3.2 23.7
06/01/2015 12/28/2015 Intel Altera $18,220 8.3 27.4
05/28/2015 01/26/2016 AvagoTechnologies Broadcom $36,950 4.0 19.0
05/28/2015 12/07/2015 BeijingJianGuangAssetManagement
NXPSemiconductors,(RFPowerBusiness)
$1,800 NA NA
03/01/2015 12/07/2015 NXPSemiconductor FreescaleSemiconductor $17,297 3.6 16.1
12/1/2014 03/12/2015 CypressSemiconductor SpansionSemiconductor $2,182 1.5 17.3
10/15/2014 08/13/2015 Qualcomm CSR $2,371 2.7 32.3
08/20/2014 01/13/2015 InfineonTechnologies InternationalRectifier $3,041 2.2 13.9
08/14/2014 01/28/2016 CITICCapitalPartnersandmanymore OmniVisionTechnologies $1,886 1.0 11.8
06/09/2014 07/21/2014 AnalogDevices(ADI) HittiteMicrowave $2,447 7.1 16.7
12/16/2013 05/06/2014 AvagoTechnologiesWireless LSI $6,611 2.5 18.0
09/12/2011 02/17/2012 Broadcom NetLogic $3,661 8.5 35.5
04/04/2011 09/23/2011 TexasInstruments NationalSemiconductor $8,016 4.6 12.1
01/05/2011 05/24/2011 QUALCOMM Atheros $3,581 3.3 20.8
Source:CapitalIQ*TransactionValueequalspurchasepricenotadjustedforcashordebt
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For2016,weexpectthemegadealstocontinue,butitwillbedifficulttoeclipsethemergeractivitywitnessedin2015.Infact,asofourpublicationdate,therehavebeennomajortransactionsannouncedin2016thusfar.
However,manymegadealshavebeenrumoredinthepressandsomeofthesearestilllikelytoplayout,including:
‒ IntelmakingamoveforQualcomm;
‒ TexasInstrumentsmakinganotherlarge-scaleacquisition;
‒ amergerbetweenMediaTekandNvidia;
‒ apossibleacquisitionofMaxim;
‒ and,asacompetitiveresponsetoIntel'sacquisitionofAltera,QualcommmightchoosetogoafterXilinx.
Notwithstandingthelackofactivitysofarin2016,wethinksomeoftheserumorswillprovetobeprescient.
Nonetheless,asthiscurrentwaveofsemiconductormegadealscrests,webelieveanotherM&Atrendwillemerge,fueledbytherationalizationofthemegadealsalreadydoneandthedesiretoachieveanticipatedcostsynergies.WebelievethatmanyofthekingsofthecurrentM&Awavearenowgettingdowntotherealbusinessofintegrationwiththegoalofrealizingtheperceivedsynergiesandambitionsthatinitiallyfueledthiscurrentwave.Ascompaniesanalyzetheiracquisitionsandworkonintegration,theywillkeepthepiecesthatfit,rationalizepotentiallyredundantmanagementpositionsandR&Defforts,andlooktoselloffbusinessesthatarenotviewedascore.Webelievethatthiswillresultinatailofsmallerdivestituresofnon-coreassetsandthereforetheacquisitionofthesepropertiesbythemoredominantplayersinagivensectorwhowillbeworkingatfurthersecuringtheirmarketposition.Inclassicfashion,ifyouarenot1st,2ndor3rdinagivensector,youareprobablyaseller.
And,indeed,wecanalreadyseeanimpactonR&DspendingfromthecurrentwaveofM&Aactivity,withthemajorityofR&Dspendingmadebythetop10players
“Thesemiconductorindustryspentarecord$56.4billiononresearchanddevelopmentin2015,thoughgrowthinthistypeofspendingslowedduetoconsolidation,concernsovertheglobaleconomyand
2016Outlook:Megadealscrestandthirdphasebegins
IntegrationandRationalization–The“ThirdWave”
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slumpingsalesinthesecondhalfoftheyear,accordingtomarketresearchfirmICInsights,Inc.
The2015semiconductorindustryR&Dspendingtotalwasupjust0.5%from2014,thelowestrateofincreasesincethedownturnyearof2009,ICInsights(Scottsdale,Ariz.)said.Thegrowthin2015wasalsosignificantlybelowthechipindustryR&Dspendingcompoundannualgrowthrate(CAGR)overthepast10years,4%,ICInsightssaid.
Collectively,thetop10spendersincreasedR&Dspendingbyabout2%comparedto2014,higherthantheoverall0.5%increase.CumulativeR&Dspendingbythetop10—whichtotaledabout$30.8billion—exceededR&Dexpendituresbytherestofthesemiconductorindustry,whichcametoabout$25.6billion,ICInsightssaid.”(Source:EETimes)
DealSynergies–AmbitiousGoalsforExpenseReductionWhenweexaminetheannouncedsynergies(gleanedeitherfrompressreleasesorconferencecallsannouncingthesetransactions),weseeambitiousgoalsforcostreduction–anywherefrom8%to17%oftotalcombinedoperatingexpense,representinghundredsofmillionsofdollars(SeeFigure5,below).Acquirorsarepredictingrelativelysignificantexpensereductionsoverthelongterm.Forexample,Avago,havingacquiredmuchlargerBroadcom(justover50%larger,intermsofrevenue,basedon2014fullyearfigures),isplanningonachieving$750millionofcostreductionsonanexpensebaseofabout$5.6billion,representingsavingsofaround13%.Whilesomeofthiswillnodoubtflowfromsharedadministrativeoverheadandincreasedoperationalefficiency,itisworthnotingthatwhileBroadcomiswellregardedforinnovationandR&Dsuccess,Avago’sreputationseemstorunmoretowardaggressiveexpensemanagementandrapidgrowththroughacquisition.
LookingatIntel’sacquisitionofAltera,Inteldeclinedtoannounceaspecificcostsynergytarget,butallocatedtheoverallvaluationto“60%productsynergiesand40%costandmanufacturingsynergies(specificallySG&AratherthanR&D).”AsthePCmarketcontinuestodecline,Inteliseyeingthedatacentermarket,andAlteraprovidesthemwitharobustFPGApositionaswellasproductsaimedatseveralotherinterestingmarkets,includingIoT,communications,andconsumerelectronics.
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Figure5:DealSynergiesTable
Basedontherecentmagnitudeofsemiconductormergeractivity,weexpectarippleeffectinrelatedbusinesses,suchasfoundry,assembly&test,andElectronicDesignTools(EDA).InsomecaseswebelievethatrippleeffecthasthepotentialtoreducerequirementsforfoundrycapacityandEDAtools(atleastinthenearterm)asIDMslooktomaximizecapacityutilizationandcutR&Dspending.Conversely,thiscouldalsohavetheeffectofincreasingthedemandforthingslikeoutsourceddesignservicesascompanieslooktoachievesynergiesandreduceoverallexpense.ThisrippleeffectcouldcatalyzeawaveofM&Aactivityintheserelatedmarkets.
Thisthirdwavemightalsoincludeplayersfromoutsidethesemiconductorindustry.Apple,forexample,hasbeenquietlyverticallyintegratingitselfintothesemiconductorindustrybeginningwiththeacquisitionofPASemiconductorin2008,whichbecametheunderpinningoftheprocessorarchitectureusedintheiPhoneandiPad.In2010,AppleboughtIntrinsity,amakerofhigh-speedmobilechips,andin2013,ApplepurchasedPassifSemiconductor,adeveloperoflowpowercommunicationschips.Morerecently,AppleacquiredafabfromMaximlatelastyear,whichhasgeneratedquiteabitofinterestingspeculation.InadditiontoApple,AmazonrecentlyacquiredAnnapurnaLabs,givingititsownmicroprocessorcapabilities.IncontrasttoApple'sstrategyofdevelopingcaptivecapabilities,Amazonisalsosellingitsmicroprocessorstothirdparties.Othernon-
AnnouncedDate Acquiror Target
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Reduction01/13/2016 Microchip
TechnologiesAtmel $1,955 $170 8.7%
11/18/2015 ONSemiconductor FairchildSemiconductor $1,398 $150 10.7%
10/21/2015 WesternDigital SanDisk $4,208 $500 11.9%
10/19/2015 Microsemi PMC-Sierra $921 $100 10.9%
05/28/2015 AvagoTechnologies Broadcom $5,584 $750 13.4%
03/01/2015 NXPSemiconductor FreescaleSemiconductor $3,008 $500 16.6%
(1)TrailingtwelvemonthscalculatedclosestquartertoannounceddateSource:CompanyFinancials
SecondaryEffects
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traditionalplayersthatmightacquiresemiconductorcompaniesincludeMicrosoft,FacebookandGoogle.
Finally,potentiallyoneofthebiggesttrendsweseeonthehorizoncomesfromChina'sdesiretobecomeamajorforceinthesemiconductorindustry,whichiscoveredingreaterdetaillaterinthisreport.
Semiconductors–ACaseforaMaturingIndustryOnceatrue"growthindustry,"thesemiconductorindustryhasseenagradualbutconsistentlongtermdeclineinitsgrowthrate.(SeeFig.6,below)Becauseoftheratherclassic"commodity"patternoftheindustry(highfixedcosts/lowvariablecost),whichisfurtherintensifiedbyMoore'sLawandthepatternofextremelyrapidpaceofproductdevelopment(typicallyabrandnewproductcantakeayearormoretodevelop,andtheninmanyinstancesbecomeessentiallyobsoletewithin18-24months),theindustryhadhistoricallybeencharacterizedbycyclesofboomandbust.Thesecyclesarenownoticeablylessvolatile,anotherindicationofindustrymaturity,wherelargeplayershavesignificantlongtermadvantagesovernewentrants.
Figure6:ICMarketGrowthDramaticallySlower(CAGRforPeriod)
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CertainforcesdriveM&Ainanyindustry,andtheyareondisplayaswestudytherecentactivityinsemiconductorsaswell.Theseinclude:
‒ Thedesiretogainaccesstonewcustomers,brandsormarkets
‒ Closingagapintechnologyorproductportfolio
‒ Togainincreasedbargainingpowerwitheithersuppliers,customers,orboth
Moreover,onceapatternofconsolidationemergesinaparticularindustry,ittendstofeedonitself.Industryplayersgetlargerthroughacquisition,andparticipantswhohavenotyetmadeasubstantialacquisitionbegintofearmissingoutandfeelthattheymust"eatorbeeaten."Weseethisclearlyintheprogressionoftransactionsthroughcalendar2015.
Furthercontributingtotheoverallpushforconsolidationandgrowththroughacquisition,thesemiconductorindustryhashistoricallybeencharacterizedbystrongcustomerpricingpower.Ascustomersnegotiatewithproducers,withbothsidescontemplatingmulti-year(“designed-in”)relationships,semiconductormanufacturersfacefurtherpressuretoaddscaleandreducecosts,whichhashistoricallybeenpossibleasaresultofMoore’sLaw.However,overthelastfiveyearsithasbecomeincreasinglychallengingtodeliveronMoore’slawfromacost,power,andtimerequiredtodeploynewtechnologyperspective.AlthoughtheindustrycontinuestopushMoore’sLaw,economicsarebecomingamajorchallenge.UntilafewyearsagoadeclineinthecostoftransistorsnicelytrackedMoore’slaw.
ForcesDrivingSemiconductorM&A
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However,whentheindustryreachedthe28-nanometerprocessnode,manufacturingcostsbegantorise.Unlesstheindustryisabletofindawaybackontoa(moretypical)decliningcostcurve,itwillbeverydifficulttodelivertheannualpricedeclinesthatcustomershavehistoricallydemanded(andobtained).(SeeFigure7,below)
Figure7:ShrinkingChips
Tomakemattersworse,competitiveconditionsinthemarketplacehavemadeitnecessaryforproducerstoaddadditionalvalue-addedelementssuchasco-developmentofhardwareandsoftware,puttingfurtherpressureoncostsandincreasingthemotivationtospreadthesecostsoverlarger-scalemanufacturingoperations.Andontopofallofthis,wehavehistoricallylowcostsoffinancing,addingmorefueltothefire.
CouldtheInternetofThingsturntheTide?ManyindustryobserversarepredictingthattheInternetofThingscouldrepresentthenextmajorstageofgrowthforthesemiconductorindustry.Andwithforecastsashighas50billionconnecteddevicesby2020,thiswillcertainlyconsumealotofsilicon.However,thisnextlegofgrowthisabitdifferentfromtheseriesofspecific,concentratedgrowthplatforms(personalcomputers,notebooks/laptops,smartphones,etc.)thathavefueledindustrygrowthinthepast.TheInternetofThingswillbeamuchmorefragmentedmarket,especiallyforthose50billionenddevices.
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ThevastmajorityofthesemiconductorcontentinIoTenddevicesor“Things”willbelower-ASP/lower-marginsimplerdevices,andwhiletheremaybelargevolumes,theoverallimpactwillbebluntedbylowASPsandrapidcommoditization,aswellastheveryhighfragmentationoftheIoTspace,necessitatingtimeandmoneyinvestmentassemiconductorproducersstrivetoalignthemselveswithpartnersformaximuminteroperabilityandthemostcomprehensive“solution.”IoTrepresentsaclassic“ecosystem”market,wherecross-platformpartnershipswithmultipleplayersareessential,furtherincreasingthecostsofdevelopingproductsandconvertingdesignsintorevenue.
Ontheotherhand,withthevastamountofdatathatwillbegenerated,webelieveIoTwillaccelerategrowthformanyofthesemiconductorcompaniesthathavebenefitedfromthemovetocloudcomputingbyprovidingprocessorsandDRAMforservers,flashmemorytoenablesolidstatestorage,andotherchipsetsandcommunicationICsthatareusedindatacenters.WeviewIntelascontinuingtobeadominantbeneficiaryinthisdomain,provideditcancontinuetofightoffchallengesfromcompaniestryingtodriveARM-basedprocessorsintothedatacenter.(WedirectyourattentiontoWoodsideCapital’sMarch,2015reportontheInternetofThingsforadditionaldetail).
Figure8:TheIOTValueChain
IoTdrivesdatacenterdemand
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ChinaFinally,thereisChina–currentlyaffectingsomanyaspectsoftheworldeconomy.Chinahasdedicateditselftobuildingamajorpresenceinthesemiconductorindustry,whichisalreadyaffectingsemiconductorM&Aactivity.
TheChinesegovernment,recognizingthatsemiconductorsareitsbiggestimport(exceedingevenoil;Chinabuysmorethanhalfthetotalnumberofsemiconductorssoldworldwideeachyear),hasmadeitanationalprioritytodevelopadomesticsemiconductordesignandmanufacturingcapability.(SeeFigure9,below).
Figure9:2014LeadingImportstoChina
Mostofthesemiconductorcomponentspurchasedfromabroadareassembledintoproductsthatareshippedtooverseasmarkets,notconsumedinthedomesticChineseeconomy,althoughthismixisslowlychangingasChinabuildsaconsumerclass.
SalesofintegratedcircuitsmanufacturedinChinahavegrownfromUS$8.8billionin2012toaroundUS$13.1billionin2015(CAGRof14%),significantlyfasterthantheglobalindustrygrowthofUS$255billiontoUS$291billion(CAGRof5%)butstillonly4.5%ofthetotal.(SeeFigure10,below)
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($M)2014ICSales
($M)2015ICSales
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1 SKHynix* $1,560 $2,040 $2,450 $2,360 $3,200 $4,040 $4,100 DRAM $6,100
2 Samsung* 0 0 0 0 0 270 2,370 3DNANDFlash 5,700
3 SMIC** 1,070 1,555 1,320 1,542 1,962 1,970 2,222 Foundry 3,400
4 Intel* 0 30 1,865 2,380 2,650 2,710 1,830 3DNANDFlash 4,300
5 HuaHongSemi 0 0 0 571 585 665 685 Foundry 1,000
6 TSMC* 127 263 366 470 510 550 590 Foundry 2,600
7 CRMicro 207 259 213 179 165 180 190 Foundry/StdICs 270
8 Diode-BCD 100 119 125 139 155 170 180 Foundry/StdICs 250
9 XMC 0 0 0 160 150 165 175 Foundry 300
10 ASMC 94 145 147 135 117 130 120 Foundry 170
- HeJianTechnology*** 180 233 208 215 0 0 0 Foundry 0
- Others 888 1,211 1,211 660 680 695 710 - 2,800
-TotalChineseICProductions $4,226 $5,845 $7,905 $8,811 $10,174 $11,545 $13,172 - $26,890
- WWICMarket($B) $198 $264 $266 $255 $267 $291 $291 - $372
- ChineseCompanies*ShareofWWMarket
2.14% 2.22% 2.98% 3.45% 3.81% 3.97% 4.53% - 7.23%
*Chinafabproductiononly.**PartiallyownedbyTSMCandincludesXinxin(nowXMC)SalesSource:ICInsights'StrategicReviewsdatabase,CCID,CSIA,PwCXMCsaleslistedseparatelyfromSMCstartingin2012***MergedwithUMCbeginningin2013
Figure10:MajorICManufacturersinChina
Thissmallmarketsharerepresentsopportunity,especiallywhenweconsiderthefactthatin2009,onlyoneChinesesupplierhadmanagedtobreakintotheICInsightstop50fablesssemiconductorsupplierrankings.By2014,weseenineChineseplayersinthissameranking.(SeeFigure11,below).
Figure11:ChineseManufacturersinTop50FablessIC
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InJune,2014,China’sMinistryofIndustryandInformationTechnology(MIIT)announcedthe“NationalIntegratedCircuitIndustryPromotionOutline”topromotethedevelopmentofadomesticICindustry.WhilethisisnotthefirsttimetheChineseauthoritieshaveattemptedtosupporttheirdomesticsemiconductorindustry,therearesomesignificantdifferencesfrompriorattempts.Forstarters,thegovernmenthassuggestedadirectfive-yearinvestmenttargetofapproximately$19billion,whichis40timesthelevelofpreviousannouncedtargets.Thegovernmenthopesthatprivatecapitalwillaugmentthisinvestmentamounttothetuneof$100-$150billiontotalinvestmentfromcombinedgovernmentandprivatesources.Thefocusisonnationalchampionsinanumberofspecificsegments:
‒ Manufacturing(SMIC)
‒ Assembly(JCET)
‒ ADRAM/NANDmaker
‒ Asemiconductorequipmentmaker
‒ Oneormorefablesssemiconductormakers(Spreadtrum,HiSilicon,etc.)
Incontrasttopreviousefforts,thistimetheyappeartohavetakenamarket-basedapproachwherelocalprivateequityfirmsareresponsibleforinvestingpublicfundsinhopesthatthisismorelikelytoleadtosuccess.McKinseyidentifiessixnewChinesegovernment-investmentvehiclesdatingfromthelaunchofthe2014policy,with$32billionundermanagement:
‒ SinoICNationalFund
‒ Cityinvestmentfundsfrom:
‒ Beijing
‒ Hefei
‒ Shanghai
‒ Wuhan
‒ Xiamen
ChinahasalreadymadeitspresenceknownontheinternationalsemiconductorM&Ascene,outbiddingCypressSemiconductorforISSI(Cypresswithdrewfromthebidding),andoutbiddingOnSemiforFairchild(asofthiswriting,theFairchildboardhasreverseditsconclusionthattheChinesebidwas“superior,”citingtheirconcernsaboutCFIUScomplicationsdelayingorperhapsevenscotchingthedeal–seeCFIUS,below).
ChinaPromotingDomesticSemiconductorDevelopment
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Moregenerally,webelievethatChinawillcontinuetoplayadisruptiveroleinthesemiconductorindustryastheypursuetargetedacquisitionswherethereisalreadysomedepthinmanufacturing,orwherethereisalreadyalargeChina-basedworkforce,orinareaswheretheyhavesecurity/privacyconcerns(relatedtospying/espionageissues,suchasintelecommunicationsandnetworking).Inaddition,criticalIPwillbepursuedifitcanreducelegalexposureoracceleratesuccessinaparticularsector.
ButM&AandinvestmentarenottheonlytoolsatChina’sdisposal.Theycanalsoleveragetheirpositionastheworld’slargestemergingeconomytomotivatecompaniestopartneruptohelpachievetheirobjectiveofincreasinglocalsemiconductorsourcing.Somerecentexamplesinclude:
‒ QualcommformingajointventurewithGuizhouProvincetodesignandselladvancedserverchipsetsinChina.TheJVis55%ownedbytheGuizhouProvincialGovernmentand45%ownedbyQualcomm
‒ Intelisinvesting$1.5bnfora20%stakeinTsinghuaUnigroupandhasannouncedajointdevelopmenteffortwithMontageandTsinghuaUniversitytodevelopdatacentertechnologiesinChina
‒ Spreadtrum,RDA,andOmnivisionhaveallbeenessentiallyprivatized,sellingthemselvestoprivateequityplayersinChina.
TsinghuaUnigroup,aconsortiumcombiningTsinghuaUniversitytalentandownershipwithChinesegovernmentfinancialbacking,hasquietlybuiltapositionintheChinesesemiconductorindustryandrecentlyofferedtoinvestinWesternDigital(whichpresumablywouldfacilitateitsacquisitionofSandisk),althoughrecentreportssuggestthatthishasbeenwithdrawnduetoconcernsoverUSregulatoryopposition(see“CFIUS,”below).Thenamehasfeaturedprominentlyinanumberofsemiconductor-relateddealsaffectingdomesticChinesecompaniesaswellasoffshoreentitiesinTaiwan,includingSiliconPrecisionIndustries,knownasSPIL(24.9%stake),ChipMOSTechnologiesInc.,(25%stake),andPowertechTechnologyInc.,allchippackagingcompanies.Asfarasweknow,noneofthesehasyetreceivedregulatoryapprovalfromTaiwan.(TaiwanhasverystrictregulationscontrollingmainlandChineseinvestmentinitssemiconductorindustry,butregulationsarelessstrictregardingchippackaging.)TsinghuaUnigroupalsoreachedagreementinMaytoacquireacontrolling51%stakeinHewlett-PackardCo’sChinanetworkingunitfor$2.3billion,againsubjecttoregulatoryapproval,whichisnotautomatic,aswehaveseen.
ChinaHasMoreThanM&AinMind
But,NotOvernight
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Figure12:TsinghuaUnigroup
Inanycase,itwilltakeseveralyearsforChinatodisruptnewsemiconductormarkets.Thetechnologyentrybarriersarehighinmostareas,theintellectualproperty(IP)portfolioislacking,andtheoverallecosystemmustberoundedout.Thatsaid,theyarelikelyeventuallytohaveanimpactonestablishedplayers,particularlyonlower-margin,commodityproducts.ThereisprecedentwithChina’spreviousentryintoothertechmarkets(basebandICs,telecomsequipment,transformers)erodingthemarginsofcompetitorsintheEuropeanandNorthAmericanmarkets.TexasInstruments,Ericsson,STMicro,Broadcom,andNVIDIAhaveallexitedthebasebandICbusiness,andmorerecently,Qualcomm’sbusinesshasbeensignificantlyimpacted,asMediaTekandSpreadtrumhaveemergedasworthycompetitors.Otherareasatriskcouldbediscretes,modules,CMOSimagesensors,networkingchips,andmemory.OutrightacquisitionofthenecessaryIPtoproduceDRAMandNANDmightprovequitedifficult,butjointventuresforproductionwithexistingDRAM/NANDplayersispossible.
ChinaNationalICFund
TsinghuaHoldings BeijingJiankunInvestmentGroup
Holdings
(AsofFebruary2016,UnisplendourhaswithdrawnitsoffertoinvestinWesternDigital)
100%
51% 49%
80%
USD4.8bnInvestment
15%
100% 100%
20%
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Onamorepositivenote,anemergingChinasemiindustrycouldbenefitIPproviders,equipmentsuppliers,andsomeofthesecond-tiercompaniesthatcouldre-emergethroughpartnershipsorasM&Atargets.
CFIUS–TheProverbial“FlyintheOintment”AllisnotfullspeedaheadwithChina,however.TheCommitteeonForeignInvestmentintheUS(CFIUS)hastheabilitytoobstructthings.TsinghuaUnigroupwaspreparedtospend$23billiontoacquireMicronTechnologylastsummerbeforeCFIUSannounceditsintentiontoscrutinizethedeal.Theparticipantselectedtoquitpursuingthetransactionratherthanriskfurthercostonlytoreachanimpasse.Philipsrecentlyabandoneditsplanstosellan80%stakeinitsLumiLEDsLEDlightingbusinesstoGOScaleCapital,aChinese-ledgroupofinvestors,againastheresultofanegativeCFIUSreview.FearsoverCFIUSreviewleadingtodelaysoroutrightobstructionofthedealhavecausedFairchildSemiconductor’sBoardtorejectafinanciallysuperior($22pershare)offerfromaChineseconsortiuminfavorofONSemiconductor’slower(butlessatriskofunfavorableregulatoryreview)$20pershareoffer.
AnotherdealpotentiallyaffectedbyCFIUSisWesternDigital’sacquisitionofSandisk.Unisplendour(aChineseconsortiumrelatedtoTsinghuaUniversity)hadannounceditsintentiontoacquireasmuchas15%ofWesternDigitalforabout$3.8billionincash,whichwouldhaveprovidedmuchneededfundingforthecompletionoftheSandiskacquisition.We’verecentlylearnedthattheChinesetransactionhaslikelyfallenapartduetoCFIUSconcerns.
OnepotentialconsequenceofCFIUSisthatitmaysendChinesebuyerstowardEurope,wheretheregulatoryenvironmentisfarlessconfrontationalwithrespecttoactuallyclosingtechnologyacquisitionsbyChineseacquirors.
InadditiontotheCFIUSregulatoryissues,thereisanadditionalriskrelatedtocapitalcontrols.GivenChina’scurrenteconomicsituation,withsignificantpressureonthecurrencyandrelatedcapitalflight,Chinesebuyersmayfinditnecessarytodelayfullpaymentduetocontrolsonexpatriationoffunds.
NotableSemiconductorM&ATransactionsWhileachievinglargerscalecancertainlycontributetoamoreefficientcoststructureandanoverallreductioninexpenseasapercentofrevenue,webelievethattheremaybesignificantcutsinR&Dexpenditureastheindustry
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adjuststoamorematurephaseandfocusesonthingslikeprocessefficiencyandmanufacturingexcellenceratherthanpuredesigninnovation.
We’vealreadylookedataggressivecostreductionplansforanumberofthelargetransactionsof2015.Takingacloserlookatsomeoftheindividualsituationsrevealssomeinterestingelements.
Inseveralinstances,abiddingwaropenedupasmultiplebuyerscompetedforthesametarget.CypressSemiconductorattemptedtoacquireIntegratedSiliconSolutions(ISSI),butwaseventuallybestedbyahighercashofferbyaChineseconsortium.AtmelwasoriginallyapproachedbyDialogsemiconductoroftheUK,buteventuallyagreedtobeacquiredbyUSA-basedMicrochip,intheprocessexposingitselftoa$137mbreakupfeethatitmustpaytoDialog.
TheoriginalDialogproposal,inSeptemberof2015,wasvaluedat$4.5billion,orapproximately$10.42pershareincombinedcashand(ADR)stock,versusthe$8.15pershareofthefinalofferbyMicrochip,butDialogunfortunatelywitnesseda42percentsharepricedeclinefollowingitsannouncementofthetransaction,makingtheMicrochipdealultimatelythesuperiorfinancialoffer,despitethebreakupfee.
Interestingly,MicrochipmadeanunsolicitedofferforAtmelin2008,wagingaproxyfight,whichwaslaterwithdrawn.
FairchildSemiconductororiginallyannounceditwouldbeacquiredbyONSemiconductor,buteventuallyconcludedthatanunsolicitedoffermadebyaChineseconsortium(thoughttoincludeprivateequityfundsaswellassomegovernmentbacking)wassuperiortotheONSemioffer.However,onfurtherconsiderationFairchildSemiconductorturneddowntheChineseoffer,fearingthedealmightfacealengthyCFIUSreview.
AnotherrecentdealisWesternDigital’sofferforSandisk.AnnouncedinOctoberatapriceof$86.50pershare(andrepresentinganenterprisevalueofjustunder$20billion),Sandisktradedaslowas$61.74recently,suggestingafairamountofskepticisminthemarketplacearoundtheclosingofthistransactiononitscurrentterms.TherearerumorsinthepressthatSamsungisreadytomoveinifWesternDigitalbacksaway.TheattractionofSandisk’sexpertiseinsolidstatestoragetechnologyforWesternDigital,asmoreandmoreSSDtechnologypenetratesthedatacenter,isobvious.WesternDigitalinitiallyindicateditexpectssynergiesof$500millionwithin18months,andearningsaccretionwithin12monthsofclosingthedeal–but
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thatwasinOctober,andthingshavesurelychangedalotsincethen.Inparticular,asnotedabove,prospectsforthedealmayhavebeennegativelyimpactedbytherecentwithdrawal(duetoCFIUSconcerns)ofUnisplendourfroma$3.8billionoffertopurchasea15%stakeinWesternDigital.ThespecialmeetingandshareholdervoteiscurrentlyscheduledforMarch15.
LookingatIntel’sacquisitionofAltera,Inteldeclinedtoannounceaspecificcostsynergytarget,butallocatedtheoverallvaluationto“60%productsynergiesand40%costandmanufacturingsynergies(specifically,SG&AratherthanR&D).”AsthePCmarketcontinuestodecline,Inteliseyeingthedatacentermarket,andAlteraprovidesthemwitharobustFPGApositionaswellasproductsaimedatseveralotherinterestingmarkets,includingIoT,communications,andconsumerelectronics.
AnothernoteworthybiddingcontesteruptedbetweenMicrosemiandSkyworksforPMC-Sierra.OriginallyputinplaybySkyworks’Oct.5offerofapproximately$2billioncash,PMC-SierraultimatelywenttoMicrosemiwhenSkyworkswalkedawayfromabiddingwarandpocketeda$88.5millionbreakupfeeforitsefforts.MicrosemisoughtPMC-Sierraforadditionalproductofferingsaimedattelecom,datacenterandcloudcustomers.Skyworks,aprominentsmartphonesuppliertoAppleandothers,faceddeceleratingearningsanddidnotelecttoraiseitsfinaloffer.Microsemihasindicateditexpectsaround$100millionincostsynergiesoutofthedeal.AlthoughMicrosemiwastheultimatewinnerwithacombinedcashandstockdeal,atonepointPMC-SierraannouncedtheywouldgowithSkyworks’all-cashoffereventhoughitwasloweronpaperthantheMicrosemioffer,reasoningthatstockpricevolatilityinNovember2015wasameaningfulrisktoacombinedstockandcashdeal.Nonetheless,Microsemiprevailedintheend.
Finally,wecannotoverlookAvago’sacquisitionofBroadcom.Avago,havingtakenoutLSIin2013for$6.6billion,andPLXTechnology($300million)in2014,andEmulex($600million)inearly2015,nowacquiresBroadcom,whichatthetimethedealwasannounced,hadroughlydoubleAvago’srevenues(basedonpriorcalendaryearresults).Avago’sthreeprecedingdealsalladdressedproductsaimedatbigdatacenters,arapidlygrowingareadrivenbytheriseofcloudcomputing.Avagonowaddstwoveryimportantextensions–bigEthernetswitchesandnetworkprocessors,aswellaschipsusedinconsumerWi-Firoutersandsmartphones,aswellasavaluablepatentportfolio,pushingthecombinedentitytorank9thinthenumberofsemiconductorpatentsamongtheworld’stopvendors.Andthe
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Broadcomacquisition,at$37billion,isthelargestdealwe’veseenyet,creatingthesixth-largestsemiconductorsupplierworldwide.ItbecomesthethirdlargestifmemoryICrevenuesareexcluded,trailingonlyIntelandQualcomm.
ConclusionWhileM&Ahasalwaysbeenanintegralpartofthestrategicmixforthefastmoving,everchangingsemiconductorindustry,ithasrecentlytakenonevengreaterimportanceasfundamentalforcesarenowdrivingmajorstructuralchangeandestablishedplayersarebeingtakenout.
Inthisreport,wehaveattemptedtoexamineM&Aactivityoverthepastseveralyearsandidentifyanumberofthefactorsinplaythataredrivingtherecentflurryoflargedeals.Wehaveshownthatinadditiontotheusualforcesdrivingcompaniestoacquireanddivest,fundamentalchangesinMoore’sLaw,adeclineinseedcapital,andthethreatofnewcompetitiveentrantsfromChinahaveallcontributedtothesurgeinactivity.
Moreover,weexpectstrongM&Aactivitytocontinueasthesuccessfulbiddersworktodigesttheirnewlyacquiredassetsandcarefullypruneawaybusinessesthatnolongerfitwiththeirlongertermplansforthecombinedentity,whetherforcostormarket-drivenreasons.
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WoodsideCapitalPartners(WCP)–WhoWeAre
• Aglobal,independentinvestmentbankthatdeliversworld-classstrategicand
financialadvicetoemerginggrowthcompaniesintheSoftware,HardwareandInternetsectors
• Foundedin2001.• Over$8billionintransactionvalue• M&A,strategicpartnershipandcorporatefinanceadvisoryin:
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InvestmentBankingTeam [email protected]
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SpecialSituations
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