About 3 years ago, I had written an article about consolidation in the semiconductor landscape where I had articulated 4 main reasons of consolidation – Macroeconomics, Business Leadership, Technology Leadership, and IP leadership. Back then, based on the state of affairs in the semiconductor industry, I had also mentioned about my perceived notion that more mergers & acquisitions would be happening in near future. Today, we are seeing all of these four reasons manifesting themselves in a slew of merger activities. During 2011-12, I was more inclined towards macroeconomic and business reasons for mergers. But when semiconductor industry started picking up from a decline (although I would still see a below 5% CAGR in semiconductor industry as a sign of maturity), we started seeing technology and IP also coming along into the merger ambit. Recently, we also read couple of blogs about mergers driving innovation.
The macroeconomic and business reasons are not good reasons, rather compulsions for mergers, in my opinion. Whereas technology and IP are good reasons for a merger or acquisition; of course business angle comes there too, but it becomes complementary to the merger. If we look at the EDA space since 1980s and 1990s, you would agree with me that the key technology was synthesis, physical design, and physical verification, and of course all types of verification all around. The big 3 EDA companies which we see today started from there, made those technologies as their core competence, i.e. the backbone (I think, I don’t need to point which company picked up which technologyJ), and everything was built around that. They have tried through acquisitions and otherwise to step into each others’ forte, but have not been successful, so far I guess. Of course, in the adjacent areas such as IP, Synopsysand Cadence have made great strides. And they have been successful because the semiconductor ecosystem demands that.
Since last three years, I have been keeping track of key M&As in the semiconductor space. This year, amid slew of M&As happening, I was wondering about how it would look like when we complete the year by Christmas. Thanks to an IC Insights report about M&As which came mid-year. It provides mind boggling figures about M&As in $$ terms since last 5 years and the half of 2015.
The above chart reveals that in last 6 months, the M&A value has surpassed much beyond the combined M&A value of last 5 years before 2015; the combined value from 2010 – 14 sums up to $62.6 billion which is $10 billion less than $72.6 billion agreements in last 6 months. In terms of average annual M&A value, the value in last half is ~6 times the average value in 2010- 14.
How do we comprehend this upsurge of M&As? Arguably, IoT is “expected” to provide large opportunities including innovation and business in various segments, so we can say IoT related expansion is a prime criterion for the organizations to prepare themselves to avail those opportunities. But is that the sole reason for such merger-mania? For innovation, one does not need to essentially acquire or get acquired. We have seen great innovation examples between competitors without any acquisition involved; I would not be going into that detail here though.
I see stress at multiple fronts which is leading to this kind of consolidation in the backdrop of IoT innovation and opportunities. Imagine IoT opportunity is not realized as it is envisioned today. Shall we then see a situation like dot-com bust? We must understand, semiconductor industry is growing at a CAGR of <5%, input costs are rising, even wafer cost at ultra-low nodes are not scaling to the tune it used to be, the fastest growing market of smartphones is stagnating, majority of companies are struggling to increase revenues.
To me consolidation appears to be a larger reason than innovation and expansion for such M&A activities. There are positives as well. But it’s a heavy bet between boom and bust. We need to see how the industry pans out in next 5 years!
The IC Insights report can be found HERE.
Also read:
The Semiconductor Landscape – II
The Semiconductor Landscape – III
Will the IC Market Growth Rate Stagnate in 2015?
Pawan Kumar Fangaria
Founder & President at www.fangarias.com
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