ON to acquire Fairchild: pioneers join together

Last week ON Semiconductor announced it had agreed to acquire Fairchild Semiconductor for $2.4 billion. The combined company will be a major player in power analog and power discretes. It also combines two companies with ties to the beginning of the semiconductor industry.

Fairchild Semiconductor was founded in 1957 when eight key employees left Shockley Semiconductor. Shockley Semiconductor was founded by William Shockley, a co-inventor of the transistor at AT&T’s Bell Labs. One of the Fairchild founders, Robert Noyce, is credited as co-inventor of the integrated circuit (IC) in 1958 (along with Jack Kilby of Texas Instruments). Noyce and fellow Fairchild founder Gordon Moore left to form Intel in 1968. Fairchild was bought by Schlumberger Limited, an oilfield services company, in 1979. Schlumberger sold Fairchild to National Semiconductor (founded by former Fairchild employees) in 1987. In 1997 Fairchild Semiconductor was spun off from National as an independent company. Fairchild’s history (through 2010) is posted on their web site.

Fairchild was a major force in the founding of Silicon Valley. It is one of the birthplaces of the IC. Several major semiconductor companies were formed by Fairchild alumni. These companies include Intel, National Semiconductor (now part of Texas Instruments), Signetics (bought by N.V. Philips) and AMD.

ON Semiconductor also has roots in the beginning of the semiconductor industry. ON was created in 1999 when Motorola spun off its discrete semiconductor business. Motorola began a semiconductor R&D facility in Phoenix in 1949. In 1955 Motorola began mass production of semiconductors with the first commercial high-power transistor. Motorola spun off the remainder of its semiconductor business as Freescale Semiconductor in 2004. Freescale is the process of merging with NXP Semiconductor. NXP was spun off from N.V. Philips of the Netherlands in 2006. Philips was one of the original licensees of the AT&T transistor patent in 1952 and a pioneer of the European semiconductor industry. Motorola’s history is also online.

ON and Fairchild have significantly different revenue trends since becoming standalone companies in the late 1990s in the midst of a semiconductor market boom. ON’s revenues in 2000 were $2.08 billion. Revenues declined significantly with the market downturn in 2001 and did not recover to over $2 billion until 2008. ON’s revenues increased to $3.16 billion in 2014. Much of the revenue gain since 2008 has been driven by acquisitions including AMIS in 2008, California Micro Devices in 2010, Sanyo Semiconductor in 2011 and Cypress Semiconductors’ image sensor business in 2011. ON has been very profitable for the last few years, with net income percentage of revenues at 14% for 2014 and 15% for the first three quarters of 2015.

Fairchild’s revenues peaked at $1.78 billion in 2000. Revenues never recovered fully, hitting $1.67 billion in 2007 and then declining in the following market downturn. Fairchild’s 2014 revenues were $1.43 billion. Fairchild has been struggling to make profits in the last few years. It had a slight $5.0 million profit in 2013 before a $35.2 million loss in 2014. The 2014 loss was due to $49.8 million in restructuring costs as it closed wafer fabs in Utah and South Korea and an assembly & test site in Malaysia. Fairchild made a $1.1 million profit in first quarter of 2015, but lost $0.9 million in the second quarter and lost $8.2 million in the third quarter.

ON Semiconductor’s November 18 presentation on the Fairchild acquisition highlights the combined strength in power management. Citing 2014 IHS data, ON shows the combined company would be number two in power discretes (after Infineon) with 11.1% share. Their power products should have limited overlap, with ON focused on low-medium voltages and Fairchild primarily in medium-high voltage products. ON plus Fairchild would be the number 10 non-memory semiconductor company based on 2015 revenues, according to ON (in an example of manipulating definitions to fit your message). If memory companies are included, ON plus Fairchild would be the 14[SUP]th[/SUP] largest semiconductor company.

ON estimates the acquisition of Fairchild would result in $150 million in annual synergies (a buzzword for cost savings) eighteen months after the closing of the deal. Most of the savings will be from reduction in the number of employees. ON has 24,500 employees with most U.S. employees located in Phoenix, Arizona. Fairchild has 6,600 employees with U.S. employees primarily in San Jose, California and South Portland, Maine. Since ON is the acquiring company, most of the employee cuts should be on the Fairchild side. ON probably prefers to focus employment in low cost Arizona versus high cost California and relatively remote Maine.

Will the ON/Fairchild combination be successful? We at Semiconductor Intelligence believe it will be. A moderate amount of revenue will be lost in commodity products since some customers use Fairchild to second source ON and vice versa. These customers will shift some business to a third supplier in order maintain an independent second source. As ON states, the companies have limited overlap in their key power device businesses. ON has a successful track record in integrating acquired businesses. Sadly, the combination will likely result in the eventual disappearance of the Fairchild name. Thus we will lose a link to one of founding companies of the semiconductor industry.

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