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Microchip Technology Inc.’s $10.1 billion acquisition of Microsemi Corp. will not have a short-term impact on the suppliers’ distribution relationships, Microchip chairman and CEO Steve Sanghi told analysts last week. Microchip conducts business with many of Microsemi’s distributors, he added, and post-merger channel relationships will be jointly evaluated after the deal is closed.
For the time being, “Microchip’s core business will continue with the distributors we have and Microsemi’s core business will continue with the distributors they have,” Sanghi said. “Nothing changes.”
Supplier mergers inevitably have an impact on distribution, however. The M&A tsunami of recent years has consolidated the semiconductor industry. Merged suppliers often discontinue overlapping product lines, which can prompt shortages in the channel. Distributors that carry both suppliers usually end up doing more business through a single supplier partner.
Distributors that carry one supplier but not the other face a number of possible scenarios. In this case Microchip, as the acquiring company, may extend its product lines to existing Microsemi distributors. Microchip could also discontinue relationships with Microsemi distributors, or make no changes at all. Any modifications to the channel will take place after the acquisition’s closing, which is targeted for June, said Sanghi. Management from both suppliers will then meet with distribution partners. Changes -- if any -- will be made slowly, Sanghi said.
The supply chain has reason to be nervous. In the past, Microsemi consolidated its distribution channel to counter moves that competitor Broadcom made. After its acquisition of Linear Technology, Analog Devices Inc. (ADI) consolidated its global volume distribution business under Arrow Electronics Inc. and cut Avnet Inc., except for Avnet’s Premier Farnell unit. Both Arrow and Avnet had carried the ADI line for years. Arrow has been ADI’s leading distributor, according to investment firm Stifel, generating about $700 million per year in ADI sales to Avnet’s $500 million. According to Nasdaq, Arrow is Microsemi's largest distributor.
Sanghi said any past changes Microsemi made to its channel were done “for good reason.” Microchip will select the best channel for its business, Sanghi added, and right now the company works with a wide variety of distributors.
“The reason we are with many distributors is that we like it,” he told analysts. “We don’t copy anyone. They make moves that are good for them; we make moves that are good for us.”
Historically, suppliers have rationalized their channel after an acquisition. Suppliers may drop a distributor that carries a direct competitor. They may add a distributor if they are too heavily concentrated with one channel partner. In the 1980s and 1990s, U.S.-based semiconductor suppliers dropped distributors that carried Japanese semiconductor lines. This “shelf-sharing” practice has been discontinued as electronics customers seek to conduct as much businesses as possible with fewer suppliers.
Product conflict or overlap should not be a big problem with the Microchip/Microsemi merger. Microsemi strengthens Microchip’s presence in defense, aerospace, data center and communications markets; expands its Ethernet portfolio to serve industrial IoT, enterprise and carrier markets; adds specialized microcontrollers to serve the enterprise storage and optical networking markets; extends Microchip’s portfolio of timing, low power wireless, analog power and mixed signal solutions; adds discrete and FPGA new product capabilities, and drives further scale in manufacturing, customer reach and sales channels. Distribution accounts for 49 percent of Microsemi’s sales.
Moreover, Microchip does not typically divest acquired companies’ business units or product lines, Sanghi told analysts. Microchip has acquired Atmel, Micrel, ISSC Technologies Corp., Supertex, Inc. and Eqcologic, Inc.
Among global broadline distributors, Arrow Electronics Inc. and Future Electronics Inc. carry both Microchip and Microsemi. Avnet carries Microchip. The two suppliers have catalog distributors Digi-Key and Mouser in common. Microchip also distributes through Allied Electronics, Micross Components, Master Electronics, Newark element14, Phoenics Electronics, and ES Components in the Americas. Microsemi lists Falcon Electronics, RFMW Ltd., Richardson RFPD and Semi Dice Inc. as components distributors in the Americas. One industry source said the merged company will have a broad array of products that are a good fit for distribution. Several distributors contacted for this article were not available for comment.
Following the closing, the transaction is expected to be immediately accretive to Microchip’s non-GAAP earnings per share. Based on currently available information, Microchip anticipates achieving an estimated $300 million in synergies in the third year after close of transaction. Microchip plans to finance the transaction with approximately $1.6 billion of cash from the combined company's balance sheets, approximately $3.0 billion from Microchip’s existing line of credit, approximately $5.0 billion in new debt and $0.6 billion of a cash bridge loan.
