Merger and acquisition activity in the semiconductor market surged in the first half of 2015, with the value of announced deals adding up to six times the total of deals announced in the last 10 years, according to market research firm IC Insights. The increased consolidation activity is changing the supply chain landscape and follows a flurry of activity in the electronics distribution sector last year.
“In first half of this year, the value of the announcements made—not the ones that have closed, but the ones announced this year—[is about] six times the annual average of M&A activity in the last 10 years,” IC Insights analyst Rob Lineback said in an early August interview. “And there are some big deals that still could be out there. It’s hard to say how long this could go on.”
A slow recovery since the 2009 recession combined with current economic headwinds could temper the frenzy, Lineback explained. IC Insights has reduced its forecast for semiconductor market growth this year to 2%, down from a 7% growth forecast earlier this year. The forecast includes ICs and other chips, such as optoelectronics, sensors/actuators, and discrete semiconductors. IC Insights expects the semiconductor market to grow to $379.3 billion in 2015, with 5% growth expected in 2016.
“The weak economy, low dollar exchange rates in Europe and Japan, and soft demand along with high inventories in 2Q15 have cut the outlook,” Lineback said. “We're now expecting a 5% increase in 2016 to $380.3 billion versus the previous 9% projection for next year.”
Despite the slow conditions, other market forces have been fueling the consolidation fire. One is the need for semiconductor companies to round out their product portfolio in an effort to meet customers’ Internet of Things applications needs. Another is the maturing of the market itself, causing companies to seek growth through acquisition as a way to meet investor needs.
“Overall, most of the acquisitions that are done are really aimed at filling in [product] gaps at large companies,” Linebeck explained, pointing to deals between Avago and Broadcom and Intel and Altera, announced earlier this year. “They are trying to fill out their product line.”
“It’s kind of a perfect storm of things happening—including slow growth in maturing markets,” he adds. “To maintain growth, and gain favor on Wall Street, [companies are pursuing this strategy].”
The industry’s shift to the IoT market is a particularly strong influence, as companies deal with different requirements than selling products for use in PCs, tablets, and cell phones.
“This has caused companies to realize they don’t have all the pieces of the IoT puzzle,” Lineback said.
Squeezing the Middle
One of the key results of industry consolidation is a squeezing of the middle market—more M&A deals create fewer large companies at the top of the supply chain, leaving a smattering of small companies at the bottom and fewer in the middle, Lineback explained. Three major announcements this year are key contributors to this scenario:
- NXP’s announcement in March to buy Freescale for $11.8 billion in cash and stock.
- May’s announcement by Avago to acquire Broadcom for roughly $37 billion in cash and stock—the largest acquisition agreement ever reached in the integrated circuit industry, according to IC Insights.
- And Intel’s agreement to purchase Altera for $16.7 billion in cash.
The consolidation wave in the chip market means buyers and suppliers must keep a sharp eye on their business relationships and how they may change. For some, it may mean negotiating new deals or cultivating new relationships.
“These are big companies buying other fairly large companies,” Lineback said, noting that buyers and suppliers must ask themselves if they will have the mindshare they once had when the acquisition is complete. “Maybe they were a top customer or top user of semiconductors, so they got a lot of attention. Will they get that same level of interest and attention from the newly merged company? Where are they in the pecking order? That’s probably one thing [buyers] would certainly be trying to figure out.”
Negotiating better deals and seeking better pricing will be issues, too.
“If they haven’t been dealing with the companies that are taking over, there will be an effort to build a whole new relationship,” he said.
For distributors in particular, the issue of product mix comes into play.
“Usually [distributors] have products from certain companies and not others,” Lineback explained. “The question is, can they bring or keep the products that are being acquired on their line cards?”
An Entrepreneurial Industry
Fortunately for the electronics supply chain, there is no shortage of innovative ideas and people. In a consolidating market, this means there is always a manager or engineer with an idea for a start-up, so the likelihood of new entrants to the market is high. The difference today is that such firms are more likely to be acquired before they get a chance to grow into large concerns of their own.
“The one thing about the semiconductor industry—and all of high-tech—is that you always have a few engineers or middle managers that have some idea and go out and start up a company,” Lineback said. “It’s almost impossible to believe there won’t be more companies. Back in the ‘80s we saw a lot of start-ups, and they all became very big companies eventually. It’s different today. Most of the start-ups today get successful and get acquired; they very seldom become big companies on their own.”
The semiconductor consolidation wave follows an increase in merger and acquisition activity in another segment of the channel. Last year saw some key purchases in the electronic components distribution channel, altering the supplier base as well. Some of the biggest announcements included:
- TTI Inc.’s purchase of specialty distributor Astrex Electronics, expanding TTI’s business in the defense/aerospace connector market.
- Sager Electronics’ purchase of PowerGate LLC, a power specialist headquartered on the West Coast.
- Distributor RFMW’s acquisition of Axomic Pte. Ltd., expanding the distributor’s business in Southeast Asia.
- Master Electronics’ purchasing of Canadian distributor Electro Sonic, expanding Master’s business across Canada.
Consolidation has quieted in 2015 on the distribution side, though Sager followed up its purchase of PowewrGate with the acquisition of Norvell Electronics this June. Norvell will become part of Sager Power Systems, a new division the company formed following the PowerGate deal.
Distributor Arrow Electronics has made news with purchases in 2015 as well. In February, the company announced its purchase of ATM Electronic Corp., a components distributor based in Taiwan.