When the head of Europe’s largest chipmaker insists that the semiconductor acquisition bonanza is kaput, it’s worth paying attention.
After last year’s $110 billion in announced deals, Infineon AG (IFNNY) CEO Reinhard Ploss recently told Bloomberg, “It’s not the same gold rush.”
I’ll concede that the pace of chip M&A activity hasn’t kept up with last year, making my January prediction of another record-breaking year seem off so far.
But it’s only April – and therefore a bit premature to declare that the boom is suddenly a bust.
And I’m not conceding defeat, either!
Especially when we have the CEO of $150 billion market cap Intel Corporation (INTC) – which made its biggest acquisition ever last year – saying his company will continue to make acquisitions.
Here’s what’s most likely behind the slowdown and why I remain convinced we’re in store for another busy year of chip M&A.
Like with many things in life, it’s worth getting a few different opinions on a topic, rather than just accepting one person’s sentiment as gospel truth.
That’s the case here, too.
I’m reluctant to accept a lone CEO’s view as the verdict for the entire industry – no matter whether it’s Infineon’s or Intel’s chief.
And thankfully, we’re not required to do so.
A recent KPMG survey of 163 global semiconductor industry business leaders revealed that 59% of them expect the pace of M&A activity to accelerate this year, while another 34% expect it to remain the same.
“M&A has become a greater priority as semiconductor companies pursue a strategy to more quickly obtain the technology breakthroughs and revenue they need to grow their businesses,” says Gary Matuszak, global chair of KPMG’s technology, media, and telecommunications practice.
Forget priority, it’s a requirement.
As I’ve said before, the semiconductor industry is faced with shrinking margins, customer preferences for system solutions (not discrete chips), and a desperate need to re-energize growth.
Naturally, the most troubling and urgent of these industry conditions is the need for growth.
Intel’s latest quarterly results underscore this reality, too.
The Urge to Merge Is Still Great
Ever-declining PC sales have forced Intel to lower its sales growth forecasts. So instead of high single-digit growth, Intel now expects mid-single-digit growth.
What’s more, the world’s biggest semiconductor company said it’s shifting its focus to higher-growth areas, such as chips for data center machines and internet-connected devices.
But it can’t do it fast enough through its own organic growth opportunities.
That means Intel has no choice but to keep making acquisitions – and its management knows it.
When CNBC’s Jim Cramer asked, “Is it not time to do one more acquisition?” Intel CEO Brian Krzanich indicated that his company would, indeed, pursue more acquisitions.
“We’ll grow both organic and, yes, there will be some inorganic.”
To cut a long story short – without M&A, the world’s largest chip companies won’t be able to grow quick enough to satisfy investors.
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So what’s the hold up?
Companies Hate Volatility, Too
Let me be clear about one thing: Chip M&A hasn’t completely disappeared in 2016. Consider:
- On Monday, Qorvo Inc. (QRVO) expanded its growth opportunities in the Internet of Things (IoT) market by acquiring GreenPeak Technologies, a Dutch semiconductor company with a focus on short-range networking technologies. Financial terms weren’t disclosed, but based on information from previous financing rounds and commercial traction, it’s likely less than $300 million.
- Earlier this month, GigPeak Inc. (GIG) announced a $55 million deal for privately held Magnum Semiconductor Inc.
- Other deals are seemingly in the works, too, as shares of Lattice Semiconductor Corp. (LSCC) – which we pegged as a top acquisition candidate back in October – surged approximately 20% last week in anticipation of a takeover announcement.
So it’s not as if deals aren’t going through, it’s just the deals are smaller ones that aren’t making major headlines and grabbing investors’ attention.
This makes perfect sense, given the volatile markets we experienced earlier this year (don’t act like you forgot!).
As Paul Reynolds, head of finance advisory at Rothschild in London points out, “M&A activity is broadly correlated with broader equity indices, with increased prices and volume during periods of lower volatility.”
In other words, the roller-coaster stock markets we experienced in January and February kept buyers on the sideline.
Or if you prefer a more highbrow, institutional explanation, suitors held off because “fundamental visibility has weakened and the cost of capital has increased,” according to the analysts at Credit Suisse.
But that’s destined to change in the months ahead.
The Stars Are Aligning for More M&A
There are two major forces that could quicken the pace of chip M&A…
First, stock markets are on the mend. The major indices recently traded above their 200-day moving averages.
Second, the volatility monster has downed a case of Tums. The VIX Volatility Index (^VIX) currently rests below 13, having spiked above 28 earlier this year.
No doubt, corporations will want to make sure order has been restored, at least momentarily, before springing into action.
A one- to two-month lag would be perfectly normal. So in the coming months, I expect we’ll start seeing bigger chip deals go through.
And if I’m wrong, I’ll admit it, not excuse it.
Ahead of the tape,