Buy or be Bought: More Tech M&A Likely

M&A deals are forecast to surge in the technology industry this year as manufacturers partner with rivals to strengthen product portfolios and consolidate market positions. The slow-growth global economic environment is also seen fueling a rise in M&A deals and this situation will persist for years, according to industry executives and analysts.

Building on a trend that research firm IHS Inc. said began more than three years ago, companies across a broad swath of the technology market and especially in the electronics components sector, are expected this year to announce more mega M&A purchases, medium-size deals and even smaller, products-related transactions. Analysts said companies are taking advantage of swollen coffers and low borrowing rates to broaden product lines or solidify market positions.

Technology companies executed dozens of acquisitions in 2015, especially in the semiconductor market where rivals competed fiercely to snap up rivals, forcing a reshaping of the landscape. The top deals included Intel Corp.’s $16.7 billion purchase of Altera Inc., NXP’s $11.8 billion merger with Freescale Semiconductor and the mega $37 billion acquisition of Broadcom by Avago.

Other transactions in the electronics components market include the acquisition of product lines from competitors, including CommScope’s purchase of TE Connectivity’s telecom, enterprise and wireless business, as well as Corning’s acquisition of the fiber optics business of Samsung Electronics.

More such deals can be expected this year. While some of the M&A transactions predicted this year would include some already announced in 2015 – but yet to close – many will be new deals focused on cementing market positions or meant to enable companies improve their defensive strategies at a time OEM customers are emphatically demanding one-stop relationship with suppliers. Many of the new transactions will also be aimed at preparing companies for the next round of explosive growth forecasters said will start within a few years, spurred by the convergence of demand for connected products, 5G (next-generation wireless communications technology) and the Cloud. (See: 2016 Electronic Outlook: Big Lull Before the Big Spurt).

Dale Ford, VP & Chief Analyst, IHS Inc.

“Companies need to find ways to improve their profitability and the popular way that this is taking place right now has been through mergers and acquisitions,” said Dale Ford, vice president and chief analyst at IHS in an interview. “The key thing is to note that these are not acquisitions to get bigger. They are very strategic and well-thought through actions that are giving companies great benefits.”

The M&A transactions announced so far have positioned the buyers for huge cost-savings, which over years could result in substantial boost to profits. Take the acquisition of Broadcom by Avago. The buyer said in a press statement announcing the transaction that it was expecting annual savings of as much as $750 million annually within 18 months. This would be in addition to broadening the combined entity’s product portfolio at a time of tough competition from rivals in Asia and elsewhere, according to Hock Tan, president and CEO of Avago.

Hock E. Tan, president & CEO, Avago Technologies

“The combination of Avago and Broadcom creates a global diversified leader in wired and wireless communication semiconductors,” Tan said. “Avago has established a strong track record of successfully integrating companies onto its platform. Together with Broadcom, we intend to bring the combined company to a level of profitability consistent with Avago’s long-term target model.”

Competitive Bidding

The M&A engagements will remain fractious. Due to the limited number of opportunities and growing investor clamor for such deals, buyers are facing stiffer competitions and are being forced to jack up valuations for targeted companies. Microchip Technology Inc., for example, prevailed in a bidding war over Atmel Corp. with rival Dialog Semiconductor but only after offering what turned out to be a much better package of cash and stocks for the supplier of microcontrollers to Apple and other smartphone manufacturers.

In a statement last week, Atmel said it deemed Microchip’s $3.4 billion offer a “superior proposal,” and notified Dialog Semiconductor it would be terminating their prior agreement. The cancellation of the initial agreement with Dialog will cost Atmel about $137 million in previously agreed termination fees. Neither Microchip nor Atmel appear unhappy with the “break-up fees” they have to pay Dialog.

The acquisition of Atmel gives Microchip a long-sought after partner and the opportunity to entrench itself with Apple, one of Atmel’s biggest customers. It also positions the company to add new revenue streams through the extension of Atmel products to other customers.

Due to the cyclical nature of the industry, electronic manufacturers and component suppliers have historically in down-cycles fueled growth through acquisitions. It looks like 2016 will follow the same pattern. Indications are that the technology market will likely report anemic growth this year even in the United States, the current driver of global expansion in the industry.

The Consumer Technology Association (CTA) forecasts global sale of technology products will decline 2 percent in 2016 to $950 billion, adding to a drop of 8 percent in the previous year. Demand for the industry growth drivers – smartphones, PCs and tablets – are expected to be tepid and new products that are beginning to ramp have not yet attained mass adoption.

“Aggressive competition, longer product replacement cycles and disruptive innovation replacing legacy products create financial challenges for segments of our industry,” said Gary Shapiro, president and CEO of CTA, in a statement. “However, we believe newer categories, continuing innovation and improving economic conditions provide additional cause for industry optimism.”

The rapid rise in the number of mergers and acquisition activities in the industry is partly in response to the slower-growth conditions but also an acknowledgement by the supply chain of fundamental changes taking place in the marketplace, according to analysts. With non-traditional players entering the electronics equipment market as a result of the expected proliferation of connected devices manufacturers are consolidating their industry segments to be more competitive, said Ford at IHS.

“Companies need to look at mergers and acquisitions in an intelligent way, not just getting big, but finding opportunities to rework their product portfolios and improve their cost profiles,” Ford said. “That’s really critical in this environment. We’re seeing companies do that now [but] given the low-growth environment, we’re going to see that continue in the next year. They are completely reinventing themselves.”