ON Semiconductor Sells IGBT Line to Close Fairchild Deal

ON Semiconductor Corp. has sold its insulated gate bipolar transistor (IGBT) product line to Littelfuse, Inc. in order to move ahead with its acquisition of Fairchild Semiconductor. The U.S. Federal Trade Commission (FTC) required that ON Semiconductor “dispose of its” IGBT business prior to the closing of the acquisition. The IGBT business generated less than $25 million in revenue in FY2015.

The FTC complaint charges that ON Semiconductor’s proposed $2.4 billion acquisition of Fairchild Semiconductor is anticompetitive. The merged company would have a combined share of more than 60 percent in the global IGBT market for automotive ignition systems or ignition IGBTs, according to the FTC.

“Without a divestiture, it is likely that the proposed merger would substantially lessen competition in the worldwide market for Ignition IGBTs, resulting in higher prices and reduced innovation,” FTC said.

A similar situation occurred when NXP acquired Freescale. NXP had to sell its RF power transistor products to satisfy the regulatory agency reviewing the acquisition, said Rob Lineback, senior market research analyst at IC Insights.

In this one pocket of power there have been problems with acquisitions, said Lineback. One company ends up with too much market share that bothers some of the government agencies, he added.

“The segment of power discretes and power transistors has become an acquisition hot bed since Infineon bought International Rectifier at the beginning of 2015 for $3 billion,” said Lineback. “Infineon is making a big push into the power area and upped the ante when it bought International Rectifier.”

Lineback expects ON Semiconductor to become the second largest discrete supplier, following Infineon, after it completes the acquisition of Fairchild Semiconductor.

Infineon also plans to boost its revenues with the acquisition of Cree’s Wolfspeed power and RF business for $850 million.

“Last year was a record-breaking year for acquisitions by far,” said Lineback. “A lot of it is because of the big ones like Avago buying Broadcom for $37 billion. “This year we’re about half of where we ended up last year. We’re at $52 billion so far in 2016 but it does not include the potential Renesas acquisition of Intersil.”

Other recent sales that expect to shake-up the semiconductor industry include NXP’s sale of its standard products, which will include some discretes, to Chinese investors that will form a new company – Nexperia - in the Netherlands. This is expected to be completed by the first quarter of 2017. Analog Devices Inc. (ADI) also recently announced it will acquire Linear Technology for $14.8 billion.

“Some of the forces driving acquisitions last year are still in place. Companies need to be bigger because markets aren’t growing as fast as they used to,” said Lineback.

Littelfuse Expansion

In addition to acquiring ON Semi’s IGBT business, Littelfuse also entered into an agreement to buy the company’s transient voltage suppression (TVS) diode and switching thyristor product lines for a combined $104 million in cash. Annualized revenue for the product lines is about $55 million.

“No manufacturing assets will be transferred by ON Semiconductor in connection with the divestiture of the ignition IGBT business or the sale of the TVS and thyristor businesses, and both asset sales are expected to close on August 29, 2016,” said ON Semiconductor.

The acquisitions will expand Littelfuse’s power semiconductor portfolio and its presence in the automotive electronics market.

“The acquisition of this portfolio aligns with our strategy to expand in power semiconductor applications as well as increase our presence in the automotive electronics market,” said Ian Highley, senior vice president and general manager, semiconductor products and chief technology officer for Littelfuse, in a statement. “These products have strong synergies with our existing circuit protection business, will strengthen our channel partnerships and customer engagement, and expand our power semiconductor portfolio.”

Littelfuse also plans to invest approximately $30 million in its semiconductor fabrication locations to enhance its production capabilities, add significant capacity to its China fabrication facility and transfer the production of the acquired portfolio.

At this point it’s difficult to determine if there will be a short-term supply issue as a result of the production transfer. Littelfuse said it is talking with customers about their requirements and the transfers will occur over the next few years.

Although details of the acquisition haven’t been released, they likely structured the acquisition in a way where there will be no disruptions, said Lineback.

“In a lot of these acquisitions where a product line is being sold the company continues to manufacture product for a stretch of time until they can make the transfer,” Lineback continued. “The problem with automotive is that there are a lot of qualifications that have to be done when moving product from one manufacturing site to another.”

“Once we complete the transfer of these products, we expect this acquisition to have EBITDA margins of more than 30 percent,” said Meenal Sethna, executive vice president and chief financial officer, in a statement. “Including amortization, interest and integration expenses, we expect the earnings per diluted share impact of this acquisition to be neutral in 2016, and accretive in 2017 and beyond.”

This flurry of mergers and acquisitions – and consolidation - over the past two years not only causes a shift in the semiconductor rankings but also raises supply chain issues ranging from on-time shipments to changes in the distribution network. This often requires putting risk mitigation measures in places such as inventory/safety stock, and above all else, tighter communications with suppliers to reduce the risk of a supply disruption.