Although the value of mergers between semiconductor companies declined in 2017, the two-dozen deals that were consummated last year will have a long-term impact on the supply chain. As chip companies merge, overlapping product lines are often discontinued and the vendor base available to purchasing organizations is decreased by one. Combined with an uptick in demand for electronic components, chip M&A contributed to a shortfall of supply that’s expected to last until mid-2018.
The total value of M&A deals reached in 2017 was still more than twice the annual average in the first half of this decade, according to IC Insights’ new 2018 McClean Report. About two dozen acquisition agreements were reached between semiconductor companies, business units, product lines, and related assets in 2017 with a combined value of $27.7 billion, compared with the record-high $107.3 billion set in 2015 and the $99.8 billion total in 2016. Prior to the explosion of semiconductor acquisitions that erupted several years ago, M&A agreements in the chip industry had a total annual average value of about $12.6 billion between 2010 and 2015.
Two big-dollar deals of 2017 (Toshiba/Western Digital and Marvell/Cavium) impacted commodities and non-commodities alike. The memory market is displaying its usual volatility, and high-end semiconductors are facing supply constraints in 2018. EMS services provider Jabil released a procurement report at the end of last year which said microprocessor, ASIC and chipset lead times were extending and that programmable logic supply was constrained. Component manufacturers have been cautious about adding capacity, although Jabil reports commodity semiconductor suppliers are operating at 90 percent utilization. Earlier this month, Gartner predicted that component shortages, a rising bill of materials (BOM) and the resulting prospect of having to raise average selling prices (ASPs) will contribute to a volatile market through 2018.
Markets that are driving demand include the Internet of Things (IoT); wearable systems; highly “intelligent” embedded electronics, including the growing amount of automated driver-assist capabilities in new cars; and fully autonomous vehicles. Semiconductor acquisitions accelerated in the 2015-time frame, said IC Insights, because companies began buying other chip businesses to offset slow growth rates in major end-use applications (such as smartphones, PCs, and tablets) and to expand their reach into huge new market opportunities.
IC Insights anticipates chip M&A will continue to be sluggish, at least compared with recent years. Acquisition targets are shrinking and the task of merging operations together remains challenging. Regulatory reviews of planned mergers by government agencies in Europe, the U.S., and China have also slowed the pace of large semiconductor acquisitions. However, Qualcomm Inc. announced on Jan. 18 that the European Commission and the Korea Fair Trade Commission (KFTC) authorized the acquisition by Qualcomm River Holdings B.V., an indirect wholly owned subsidiary of Qualcomm, of NXP Semiconductors N.V. (NASDAQ: NXPI). The acquisition has now received 8 of the 9 approvals around the world, with China remaining.
Product-wise, Qualcomm committed to exclude certain near-field communication (NFC) patents from the proposed transaction and ensure that NXP licenses those patents to third parties. Qualcomm also committed not to assert the NFC patents it will acquire from NXP and maintain interoperability between Qualcomm’s baseband chipsets and NXP’s NFC chips and rivals’ baseband chipsets and NFC chips.
One of the big differences between semiconductor M&A in 2017 and the two prior years was that far fewer megadeals were announced, according to IC Insights. In 2017, only two acquisition agreements exceeded $1 billion in value (the $18 billion deal for Toshiba’s memory business and Marvell’s planned $6 billion purchase of Cavium). Ten semiconductor acquisition agreements in 2015 exceeded $1 billion and seven in 2016 were valued over $1 billion. The two large acquisition agreements in 2017 pushed the average value of semiconductor M&A pacts to $1.3 billion. Without those megadeals, the average would have been just $185 million last year. The average value of 22 semiconductor acquisition agreements struck in 2015 was $4.9 billion. In 2016, the average for 29 M&A agreements was $3.4 billion, based on data compiled by IC Insights.
The big acquisition deals accounted for 87 percent of the M&A total in 2017, and without them, the year would have been subpar in terms of the typical annual value of announced transactions. The falloff in the value of semiconductor acquisition agreements in 2017 suggests that the feverish pace of M&A deals is finally cooling off, IC Insights concluded.