Nvidia’s $40 Billion ARM Purchase Will Test M&A ‘Ceiling’
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Altera Corp.’s acquisition by Intel Corp. looks like a sure winner in all ways but one: Altera’s distribution channel.
FPGA maker Altera and its closest rival Xilinx Inc. are two of the last suppliers practicing an unofficial distribution policy called “shelf-sharing.” Under shelf-sharing, a supplier refuses to be sold by (or "share shelf" with) any distributor that also carries a competing line. Historically, Altera and Xilinx have not shared shelf: Xilinx is closely identified with global distributor Avnet Inc., and Altera with global broadline Arrow Electronics Inc. Both Arrow and Avnet carry Intel.
During shelf-sharing’s heyday, many U.S.-based semiconductor makers refused to be sold by distributors that carried Japanese vendors. U.S. suppliers ostensibly objected to the Japanese undercutting prices. The distribution channel’s massive consolidation during the 1980s and 1990s frequently brought U.S. and Japanese vendors together. Usually, the U.S. vendor would drop the distributor with the Japanese line.
Intel was one of the few U.S. chipmakers that did not object to shelf-sharing with the Japanese although it wasn’t always sold alongside Advanced Micro Devices. A lot has changed since the prime shelf-sharing years, including s seismic power shift. Semiconductor companies used to dwarf their distribution partners in terms of revenue, and they readily used this clout. Distributors faced losing a prime product line and all the business that went along with it if they added a Japanese supplier. But the revenue tables have turned: many generalist semiconductor suppliers have now split into numerous – and smaller -- specialists. Avnet and Arrow, at more than $20 billion each, now outsize most of their suppliers. Although distributors stop short of dictating to their suppliers, their size and reach have certainly increased their leverage as a business partner.
Another consideration, particularly in the FPGA market, is the channel’s role in customer service. Distributors have taken the lead in FPGA programming services for tens of thousands of customers. Because of the customized and variable nature of FPGAs, Altera and Xilinx outsource programming for all but a few select customers. In fact, the vast majority of Altera’s and Xilinx’s volume passes through distribution.
So distribution’s clout could be put to the test by the Intel/Altera acquisition. Any change in Altera's or Xilinx's distribution channel will be significant for customers.
Arrow and Avnet are the world’s largest global electronics distributors and have carried Intel for decades, but Intel is undeniably the 800-pound gorilla of the semiconductor market. Neither Arrow nor Avnet, despite their size, are likely to jeopardize their relationship with Intel. Intel, on the other hand, could do a number of things with its channel. It could maintain status quo and keep Altera and Xilinx channels separate. Intel could add Altera’s products to its portfolio and be sold alongside Xilinx; or force distributors to drop Xilinx in favor of Intel/Altera. Xilinx, for its part, could try to add distributors that have historically carried Altera, or partner with one or more global distributors that don’t carry Intel or Altera. There are at least two, according to an Internet search: Future Electronics Inc. does not list Altera, Intel or Xilinx as suppliers; nor does WPG Americas.
If this sounds confusing, it’s because it is. Buyers, for many different reasons, can’t buy all products through one distributor. Most buyers wouldn’t do this anyway to minimize risk. Suppliers understandably want maximum attention and support from their distributors. But the alliances that used to shift because of shelf-sharing only harmed customers. Any chip maker that isn’t around today didn’t fail because it was sold alongside a Japanese (or domestic) competitor. It failed for reasons of technology, financial mismanagement, market shifts or a myriad of other things. As EPS Bolaji Ojo points out, Altera improves its competitive position by being acquired by Intel:
For Altera, a hook up with Intel would help the company improve its financial performance in many ways in addition to keeping it competitive against rival Xilinx Inc. The company should benefit from Intel’s manufacturing prowess and leading-edge process technology, according to executives at the two companies. Altera has fallen behind Xilinx in recent years and its annual sales trail those of the main rival by several hundred dollars. In 2014, Altera reported sales of $1.9 billion while Xilinx for the same four-quarter period had sales of $2.4 billion.
Altera and Xilinx both face ongoing pressures from smaller rivals and competing technologies, however, and had been looking for ways to reduce costs and improve productivity and profit margins. This transaction should lessen the manufacturing cost pressure on Altera and improve its sales position once the company’s current offerings are coupled with Intel products. Customers could be attracted by the opportunity to purchase complimentary components from a single supplier, according to executives.
Whether they’ll be able to purchase them through a single distributor remains to be seen.
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