4 Signs of Unprecedented Times in the Semiconductor Industry
The unprecedented times we are living in have not skipped over the semiconductor and advanced technology manufacturing industries. This amazing confluence of factors years in the making, converging at a dizzying speed, would leave any business owner reviewing their options and contemplating their path forward. Whether aiming to invest, grow, sell, or simply maintain their businesses, the effects of these industry influences will affect companies of all sizes and the path forward for everyone. CDI Global is here to help business owners and in a complex world.
Let’s take a look at some of the different factors dominating the semiconductor industry:
Semiconductor companies, looking at ever increasing R&D costs, technology turnover, and the positive results of economies of scale have consolidated at a historic rate over the past 10 years. Per Accenture’s Semiconductor M&A report, the top 160 semiconductor companies in 2011, as defined by revenue, have reorganized into fewer than 100 now. In the third quarter of 2020 alone, we saw another round of mega-deals including the merger of Analog Devices and Maxim Integrated, AMD’s acquisition of Xilinx, and Nvidia’s acquisition of ARM.
This feverish activity is not isolated to the largest publicly traded and Fortune 1000 ranked companies. The middle-market has experienced the same consolidating forces, driven by larger companies’ quest to differentiate, move up the technology stack, gain scale and scope, and acquire IP. Private equity capital is increasingly turning its eye to the semiconductor middle-market as well, attracted by the prospects of rising profitability and looking to participate in the benefits of the economies of scale that consolidation brings.
By deal value, 2020 was the busiest year in semiconductor M&A in history. This activity is not expected to diminish any time soon.
The fervor in semiconductor M&A has arrived despite high valuations, which have been driven primarily by a few factors:
– Demand for chips is at historic levels driven by the roll-out of 5G smartphones and related infrastructure, the continuing trend of increased semiconductor and electronic components in automobiles, and ever-increasing consumer demand bolstered by the realities of COVID and the “Work-From-Home” economy.
– The semiconductor industry has been unable to meet this critical demand, resulting in shortages. The effects can be felt already; General Motors has enacted production cuts at three of its North American plants due to the shortage, and other automakers are reporting critically low inventory in this supply. The long lead-time to increase production capacity and the geopolitical intricacies of a global manufacturing ecosystem means these shortages are not likely to subside soon.
– Semiconductor companies have been competing on price for years. With a desire to diversify revenue streams and show differentiation, executive boards have been looking to new products, services, technologies, IP, and increased scope & scale to move up the technology stack and capture additional value. This search has caused competition for valuable assets and a commiserate increase in valuations.
Between 2013 and 2015, only three M&A deals in the US were blocked or restricted as a result of government or regulatory intervention, per Accenture’s report. That amount has multiplied almost five times between 2016 and 2018, rising to 14 deals that did not occur in that timeframe.
Semiconductors are a complicated product that play integrally into countries’ technology, economic influence, and defense / aerospace capabilities. Although military, IP, technological, manufacturing, and economic factors are all critical concerns, it is currently security and cybersecurity that are geopolitical issue by far in terms of squashing semiconductor deals. With the world becoming more and more connected, “cyber trust” for key components and infrastructure produced or developed on foreign soil is at a premium.
A new administration in Washington DC could mean a potential windfall of government money to the semiconductor industry. With China investing a staggering $100 billion into developing its domestic chip manufacturing strategy, US semiconductor business leaders have taken notice and made their concerns clear. Newly appointed Intel CEO, Bob Swan, published an open letter to President Biden urging for a national manufacturing and investment strategy to compete with the increased dominance of Asian-Pacific manufacturers. Also, the industry group SEMI has called for an overhaul of export controls. On February 11th, 2021, a group of 21 CEOs from some of the largest US semiconductor manufacturers drafted another open letter to President Biden urging the support of domestic production. The letter included an appeal for “substantial funding for incentives for semiconductor manufacturing, in the form of grants and/or tax credits”.
The new administration is paying attention. Per a White House press briefing, President Biden is expected to sign an executive order in the next few weeks directing the National Economic Council and National Security Council to conduct a supply chain review for critical goods, with the semiconductor shortage being a central concern.
The semiconductor industry has long been able to negotiate local & municipal incentives and tax credits for placing manufacturing and R&D in the US, a trend that is likely to continue. Are ‘grants and/or tax credits’ on the horizon? Is an influx of federal money on the way?
With industry shaking consolidation, sky-high valuations, historic demand, capacity shortages, geopolitical intrigue, and the possibility of government support…