The consolidation of the semiconductor sector has moved into a new phase involving mega transactions that may trigger similarly large acquisitions in other segments of the electronics market and further the redrawing of the industry supply chain as OEMs, contract manufacturers and component distributors re-align with the new power centers.
IC market consolidators had been expected to go for bigger targets but not many thought they would blow the lid right off the list of "untouchables." The $130 billion offer by Broadcom Ltd. for Qualcomm Corp. demolished the idea that certain semiconductor behemoths might be beyond consolidators' reach because of their size, lofty market valuation and the complexities involved in arranging the financing of such transactions and integrating the enterprises into the buyer.
Broadcom’s offer has made it possible for the electronics industry to imagine the unthinkable: can Intel Corp. be acquired? How about Apple Inc. or IBM Corp.? Does it matter how big an enterprise is anymore? Whether Broadcom succeeds in purchasing Qualcomm is no longer important; Most analysts think it will have to jack up its financial offer and be prepared to meet stringent regulatory conditions in North America, Europe and Asia. The more significant lesson for the electronics supply chain is that there are no untouchables or enterprises that are too big to buy. Notwithstanding size, market domination and market capitalization, any enterprise in the high-tech sector can land on somebody’s “to-buy” list.
Every company in the supply chain can be assumed to be at risk of being swallowed up by a bigger competitor or even an enterprise from outside the industry. If the biggest chipmaker is a potential target, then we can assume the biggest suppliers of interconnects, passives and electromechanical components are in play as are the top electronics component distributors in North America, Europe and Asia. Are there companies out there looking at Arrow Electronics, Avnet, WPG Holdings, Digi-Key, Electrocomponents, etc.? If yes, who might these be and what is their vision for the market? How would they reconfigure the sector?
Acquisitions have implications and come with disruptions. Buyers don’t always leave an acquisition just as they found it. They make drastic changes to drive up profit margins, eliminate product lines, add new offerings, branch into other markets, change management, drop or add suppliers and contractors, close warehouses, lay off employees and add debts. In other words, M&As can result in changes that may alter forecasts for companies in a target enterprise’s sphere and radically impact their operations.
The entire industry was startled two years ago when Avago offered $37 billion for Broadcom Corp. It was then touted as the largest ever deal in the history of the semiconductor market. That title was soon lost to Qualcomm’s pending $47 billion offer for the Netherlands-based NXP. Broadcom CEO Hock Tan is forcing the industry to think differently; No longer will anyone think any specific industry player represents an impossible target. All are in play.
Yes, that includes Intel Corp., the world’s biggest chipmaker by revenue. With a current market capitalization of about $215 billion, Intel would be a massive haul. But any psychological wall stopping a bid for Intel disintegrated when Broadcom jumped on Qualcomm. The $130 billion offer has been rejected by Qualcomm, which considered it too low, which implies M&A transactions of $150 billion and much higher are now in the realm of the possibility. That’s what a bidder would have to offer to bring Intel into play. A 40 percent premium on the company’s current market value would put a likely bid at around $300 billion.
That kind of money will not be a show stopper if someone as bold as Tan comes along with a viable proposal; many of the leading investment firms would race to provide the financing, just as they have done for Broadcom.
Since the once unthinkable is now possible, the industry should come to terms with the idea that more changes are coming down the pike. Qualcomm is only the latest in a sea of acquisition targets. All other IC vendors – except for captive divisions such as Samsung Electronics’ semiconductor unit – can be assumed to be under someone’s radar. it is now possible to imagine buyers bidding for Texas Instruments (current market value $97 billion); Analog Devices ($33 billion); Microchip Technology ($21 billion); STMicroelectronics ($22 billion) and; Linear Technology ($16 billion).
Do you want to buy Micron Technology Inc. and Texas Instruments Inc.? They are available. As of Wednesday, November 15, 2017, Micron had market capitalization of a mere $53 billion. A buyer could shell out a hefty 40 percent premium on the DRAM vendor’s stock price and pay the bargain basement price of less than $80 billion. Investment bankers would love to arrange the financing.
Texas Instruments will be more expensive but not prohibitive. At the current market value of approximately $96 billion, its acquisition offer could approach the $130 billion Broadcom wants to pay for Qualcomm. Even so, it would represent a 40 percent premium on the stock’s value as of Wednesday.
Please don't hold back if you want Intel. The world's No. 1 semiconductor vendor by revenue, is available and a deal can be struck, at the right price. With a market capitalization of $215 billion, Intel will not be cheap. But that is not an insurmountable hurdle. A premium bid of $250 billion to $300 billion could net the right buyer this prized possession. Forget about anti-trust issues. If Broadcom can contort itself into a U.S. domiciled company – shifting from Singapore – to secure Brocade and Qualcomm, a potential purchaser would find ways to avoid regulatory problems.
One more point to note. Electronics companies should stop hoarding cash. A buyer may come along and use your company’s money to finance its purchase. The brilliance of leveraged buyout is in the buyer targeting cash rich companies and, with a little help from equally stealthy investment firms, use the target acquisition's own financial resources to purchase it.
Bolaji Ojo is editor-at-large of EPSNews. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at firstname.lastname@example.org.