At the beginning of the month, Dutch chipmaker NXP Semiconductors NXPI announced that it will be acquiring Freescale Semiconductor Holdings FSL for $12 billion. The company’s CEO Rick Clemmer said the acquisition will form “a true powerhouse” in the semiconductor sector, creating a $40 billion company. Speculations about Intel Corp.’s INTC move to acquire Altera Corp. ALTR will pave the way for further consolidation in the semiconductor sector.
Intel is apparently in advanced talks to buy Altera, which is a leading field programmable gate array (FPGA) maker. Altera already has an exclusive 14nm foundry agreement with Intel. The buyout could bring the companies closer both in terms of chip design and manufacturing process.
Prior to the announcement, Altera had a market value of around $10.5 billion. This has increased substantially after the company’s share price surged 28.4% last Friday. Meanwhile, Intel’s cash balance last stood at $14.1 billion.
Going the Extra Mile
This indicates that the veteran chipmaker is willing to go the extra mile and is prepared to raise funds from debt or equity to make the acquisition. Intel’s largest acquisition til now has been McAfee, which it purchased in 2010 for $6.8 billion in cash terms. Even in this case, the amount represented only 37% of the company’s cash reserves.
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The reason for Intel’s eagerness is its need to protect its data center business while also running its chip fabrication plants at full capacity. The company still depends on personal computers for 60% of its revenues. This segment provides good cash flows and margins but cannot possibly grow further. In the short term, Altera’s faster-growing top line will add a few percentage points of growth to Intel’s.
More Deals to Follow
Consolidation touched a three-year peak in 2014 for the semiconductor sector. Total deal value stood at $19.5 billion. In volume terms, deals in 2015 have already outpaced past last year’s M&A’s. Some analysts believe at least 10% of semiconductor companies listed in the U.S. will be acquired in 2015.
Economies of scale are a major consideration driving this spate of deals. This in turn stems from the need to reduce costs and improve capacity utilization. The other driving force is the desire to bump up sales to boost an industry achieving maturity.
In fact, most chip majors share Intel’s woes. The decline of the personal computer, which constitutes the major source of demand for these chipmakers, has hastened the move toward consolidation.
Some analysts opine that companies as large as Broadcom Corp. BRCM, with a market value of $26 billion, could draw attention from potential buyers. However, more likely targets are smaller companies, starting with those that are close to Altera’s size.
3 Potential Takeover Targets
Xilinx Inc. XLNX, whose market value of $11 billion is nearly identical to that of Altera’s, is a prime takeover candidate. Among the company’s possible suitors are the likes of IBM Corp. IBM and QUALCOMM Inc. QCOM. For both IBM and Qualcomm, acquiring an FPGA producer would make perfect sense.
Atmel Corp. ATML and Silicon Laboratories Inc. SLAB would make for even easier purchases. With market values well below $5 billion, their very size could emerge as a major problem in the current environment. Valued at around $3.5 billion, Atmel has growth woes and will gain substantially from an acquisition.
Additionally, both Silicon Laboratories and Atmel can provide stable business while also presenting significant opportunities for cost reduction. Companies of this size and those that are even smaller need to evaluate their options carefully. In most cases, a strategic exit could be a prudent option.
To Conclude
The stage is set for further consolidation in the semiconductor industry. However, it is premature to predict whether the sector will emerge stronger from this trend in 2015 itself. In the short term, potential targets could witness spikes of the kind experienced recently by Altera.
By Swarup Gupta
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