As M&A Ebbs, JVs flow in semiconductor industry

Rising valuations in the semiconductor industry, regulatory constraints, and the prospect of increasing interest rates have dampened M&A activity, particularly for large deals in excess of $5 billion to $10+ billion. But that doesn’t necessarily mean inorganic growth is suddenly off the table.

Indeed, the challenges slowing M&A are causing investors and corporate strategy teams to pivot to alternatives to traditional one-and-done M&A: Joint Ventures (JVs), collaborative agreements, and other unique approaches to value creation, which can provide lower-cost and lower-risk options for accelerating growth.

In particular JVs, as we’ve previously highlighted, can contribute to a company’s growth agenda in a variety of ways:

• Cost Reduction — Enable partners to increase scale and reduce barriers to entry in certain markets
• Supply Resiliency — Provide an attractive approach to vertical integration with upstream suppliers, which can shore up supply for raw materials
• Innovation — Share intellectual property, talent, and resources for new capabilities
• Subsidies — Secure financial support from government investment

A notable example of a successful semiconductor JV is IM Flash Technologies, formed in 2006 between Intel and Micron to manufacture NAND flash memory. In five years, according to Steve Appleton, Micron’s CEO, the JV enabled Intel and Micron to jointly become the industry's NAND Flash leader. The relationship lasted more than 12 years and was a win for the two partners due to its innovative nature, decades-long tenure, and accretive exit.

Recent semiconductor JVs take center stage

With that in mind, let’s take a look at some recent examples of leading firms in the semiconductor industry that have recognized the importance of JVs and the value they can deliver.

Athinia

In December 2021, Merck KGaA (of Darmstadt, Germany) and Palantir announced a partnership to accelerate data analytics in semiconductor manufacturing. Merck KGaA is known for its science and technology expertise, while Palantir’s specialty are its software and big data applications. The joint Athinia platform will use AI to improve quality and supply chain transparency while shortening time to market.

This JV is an innovative response to current market pressures. Athinia CEO, Laura Matz, mentioned that the database integration is expected to boost manufacturing efficiencies with military-grade security for leading chipmakers.

JASM (Japan Advanced Semiconductor Manufacturing)

In the same month, Taiwan Semiconductor (TSMC) and Sony Semiconductor Solutions Corp (SSS) announced the formation of Japan Advanced Semiconductor Manufacturing Inc. (JASM). This is the first time TSMC is using a joint venture to build a fab, but it will be critical to bolstering supply during the chip shortage.

Terushi Shimizu, SSS CEO and president, said that although the chip shortage may be prolonged, the partnership should help stabilize supply in the industry.

While this is primarily a strategy to secure inputs for manufacturing and production, a degree of government subsidies is involved as well. The Japanese government is expected to support JASM and other similar endeavors in the future.

Foxconn and Vedanta

Foxconn and Vedanta have formed an India-based JV following the national government’s $30 billion investment plan. As countries move toward semiconductor supply independence, these agreements are expected to significantly accelerate domestic semiconductor expertise. In fact, such partnerships, including collaboration and financial commitments with governments, are emerging global trends. We expect to see similar announcements beyond Japan and India in the coming year.

DiodSent

Diodes and Sentec recently announced the formation of Diodsent, a JV dedicated to development of semiconductors specifically for hybrid and plug-in election vehicles. As countries change fuel emission standards and policies starting in 2025, this partnership combines two well-established R&D pipelines to address the upcoming bans on traditional vehicles. DiodSent Vice President, Nai-Si Hu indicated that leveraging vertical integration will achieve substantial synergies. He estimates that Diodsent’s chip output efficiency is 20-30% greater than competing European suppliers, which translates into 20-30% in cost reduction.

Semiconductor Co-Investment Program (SCIP)

Intel and Brookfield have agreed to an innovative, “first-of-its-kind” joint funding vehicle in the semiconductor industry. The cost sharing is expected to accelerate and scale Intel’s manufacturing capacity while providing Brookfield long term financial returns. The SCIP was the latest partnership announcement after the passage of the CHIPS and Science Act, intended to spur domestic and international investment.

Key considerations for JV design and operation

As global semiconductor markets face numerous headwinds, investors and corporate strategy teams may pursue JVs as a potential alternative to traditional M&A. To make JVs work, the partners must carefully structure the agreements, with common design considerations including:

• Talent retention, to manage partnerships that experience hypergrowth
• Financial distress of partner, to maintain boundaries if capital is constrained
• Ownership of assets, to encourage bilateral cooperation between firms
• Incentive alignment, to ensure both entities are compensated fairly and transparently
• Governance, to measure stakeholder contributions with tangible performance metrics
• IP security, to determine the proper legal boundaries for your work and effort

Furthermore, the partners throughout relationship must continually balance a variety of competing interests involving the JV’s purpose and objectives, value drivers, management control, geographic scope, duration, and the contributions the respective firms make. And, because JVs typically last less than five years on average and most end up as an acquisition by one of the partners, it’s important that firms have a well-articulated exit strategy early on in the relationship.

When semiconductor companies consider inorganic growth, M&A usually attracts the lion’s share of attention. But it’s important to not ignore JVs, which can add value to a company’s strategic portfolio if planned and executed effectively—especially during times when M&A may not be the most attractive or financially viable option.