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Semiconductor industry M&As breach $100B mark

Posted: 03 Dec 2015 ?? ?Print Version ?Bookmark and Share

Keywords:mergers? acquisitions? semiconductor industry? consolidation?

The total value of semiconductor industry acquisitions announced this year had already surpassed the $100-billion mark after Microsemi outbid Skyworks for PMC-Sierra.

The wave of consolidation that has run rampant in the semiconductor industry for more than a year has reached new heights as buyers scramble to land a shrinking number of potential acquisition targets.

Case in point: Microsemi's agreement last week to acquire mixed-signal storage IC house PMC-Sierra Inc. for $2.5 billion in cash and stock. The purchase price is a full 25 per cent higher than the $2 billion that Skyworks Solutions agreed to pay for PMC less than two months earlier. It is also 77 per cent higher than the closing price of PMC's stock on Sept. 30, a few days before the Skyworks deal was announced.

Mergers and acquisitions have been part of the semiconductor industry's DNA from the get go. But, even in and acquisition-happy industry, 2015 has been an extraordinary year by any measure. The total value of semiconductor industry acquisitions announced this year now stands at a little over $102 billion, more than eight times the average annual value of acquisitions by semiconductor companies over the past five years, according to market research firm IC Insights Inc.

Faced with an industry that is growing far too slowly to satisfy Wall Street, chip companies have no choice but to dig deep to fund acquisitions as a way to grow revenue and scale.

"It all comes back to the pressure these companies are facing in trying to grow their sales faster than the [semiconductor] market is growing," said Rob Lineback, a senior market research analyst at IC Insights.

Kevin Cassidy, managing director of the semiconductors practice at investment banking company Stifel Financial, said the annual growth rate of the semiconductor is roughly 5 per cent to 7 per cent, not enough to offset annual engineering labour cost increases.

"If you aren't in markets that are growing faster than that, you aren't getting any leverage. You aren't bringing increased income to the investors," Cassidy said.

But Cassidywho couldn't comment specifically on the Microsemi deal to buy PMC-Sierra because Stifel is acting as a financial advisor to Microsemi on the transactionsaid that despite the flurry of M&A activity and the bidding wars that have been unfolding, the valuations of the companies being acquired haven't gotten out of whack... yet. As the wave of consolidation continues, though, Cassidy and other analysts predict that the valuations of the acquired companies will balloon.

Part of the reason that valuations are bound to get excessive is a matter of inventory. There simply aren't that many semiconductor firms for sale, and as more of them get snapped up, the pool of candidates shrinks. It's a seller's market.

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