Outside competition increasing for semi industry

In the previous M&A semiconductor blogs, we provided advice to M&A semiconductor executives to creatively think about their M&A strategy, an overview on which countries are leading M&A and now, how outside competition is increasing for the semi industry.

It’s no secret. Semiconductor companies continue to face stiffer competition for quality assets from their own customers. The ones who are ramping up their acquisition efforts to gain a stronger position in advanced technologies. Not only are traditional customers and partners making acquisitions to get a leg up in technologies such as 5G and AI, but they are also making investments in semiconductors. It doesn’t matter if it is chip manufacturing or design. Their primary motive is to achieve vertical integration of their product cycle, gaining greater control of their supply chain and relying less on third parties to stay competitive.

Let’s review the major players

In our opinion, these tech giants have gotten into the game of investing in companies with chip design capabilities that can service their datacenters and industrial spaces. Either through acquisitions or organic growth strategies they become less reliant on third parties.

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Apple

2011 acquired Anobit’s flash memory for $500m, then 2018’s $600m acquisition of Dialog Semiconductor and Intel’s smartphone modems for $1b in 2019.

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Amazon

Acquired Annapurna Labs in 2016 to design custom chips for its cloud infrastructure service (AWS).

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Facebook

Purchased Sonics in 2019 to build up its semiconductor design IP capabilities for datacenters and VR headsets.

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Cisco

Bought fabless firm Leaba Semiconductor in 2016 to design edge networking chips, then acquired Luxtera in 2018 to enter the silicon photonics market.

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Siemens

2017 acquired Mentor Graphics for $4.5 billion to broaden footing in “smart” manufacturing and automation and get a foot in for autonomous vehicles.

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ABB

Invested in AI chip manufacturing rising player, Halio to advance its Industry 4.0 applications to help drive digital transformation of industries.

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Tesla

In 2019, acquired a majority share of ultracapacitor and battery manufacturer, Maxwell Technologies which is expected to boost Tesla in the EV market.

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The future of M&A in the semiconductor industry

We know that semiconductor companies today are not only competing with each other, but also with customers looking to establish dominance in the four key emerging high-growth areas: Internet of Things (IoT), artificial intelligence (AI), automotive, and 5G. How this competition plays out remains to be seen, but here’s what we think will happen to semiconductor companies in these primary M&A battlegrounds in both the short and long terms:

Internet of Things (IoT)

• Short term: Short-term demand for high-end connected devices like smart home technologies and wearables will be dampened in the near term. However, with a strong push from companies and governments alike, IoT technology and its far-reaching applications in healthcare and supply chain management will continue to see significant attention.
• Long term: With growing use cases in autonomous driving, smart cities, remote health monitoring, and consumer electronics, IoT connected devices will number 39 billion in 2020—a 300 percent increase from 2015. The rising demand for sensors, memory, and connectivity translates into significant opportunities for semiconductor companies.
  

Artificial Intelligence (AI)

• Short term: Many end markets face weakened demand in the near term, but the cloud market remains a bright spot.¹ Driven by increasing adoption by data centers, cloud-based AI chips will be a promising area for semiconductors.
• Long term: The total AI semiconductor market is forecast to grow at a 59 percent CAGR to $33 billion by 2022.² Growth will be driven by increased use cases for AI applications, including smartphones, autonomous vehicles, healthcare, and manufacturing—areas in which U.S. semiconductor firms in, particular, have been leading AI investment.

Automotive

• Short term: Global vehicle sales will decline due to disrupted factory shutdowns, transportation delays, and reduced demand. Despite the impact of current economic uncertainties, the automotive sector will continue to see a trend toward automation and electrification—and the technologies that make these possible.
• Long term: Increasing demand for automotive applications such as advanced driver assistance systems (ADAS) and in-vehicle infotainment (IVI) will continue to require innovation from semiconductor companies. In fact, by 2022, automobiles are expected to require 50 percent more semiconductor content as they become more automated, safe, and connected.³ This translates into what’s expected to be a $60 billion automotive semiconductor market by 2022, with Asia Pacific pegged to be the source of the strongest growth. The overall global automotive IoT market is also projected to post robust growth, rising from $23 billion in 2018 to $83 billion in 2025.

5G

• Short term: With the delayed release of 3GPP’s 5G standards for standalone networks, industrial IoT, and V2X systems, project timelines for the 5G rollout will get pushed out, ultimately affecting semiconductor suppliers.
• Long term: With the volume of global data increasing tenfold, 5G’s faster transfer speed and reliability are in high demand. 5G technology relies on high-performance semiconductors and will unlock the path forward for smart cities, factories, and cars—all part of the IoT ecosystem. With accelerating adoption, 5G is expected to contribute $2.1 trillion to global real GDP by 2035.⁴

What does this mean for semiconductor M&A?

Given the current environment, early optimistic projections of 2020 M&A for the semiconductor industry’s market segments will likely be shelved, with a recession this year undermining anticipated growth in key industries and advanced products. These complications will postpone any positive outlook until Q4 of 2020, at minimum, and potentially into 2021.

For financial buyers, this opens the door to opportunistic buying. Private equity firms and investor groups can take advantage of low interest rates and “buy on the dip,” recognizing that valuations will be low and the market is primed for a recovery. Strategic buyers, on the other hand, will be combating the supply and demand challenges the current crisis has created, which means a sharp decrease in M&A activity in 2020 compared with the previous five years. Moreover, given the added complexity potential buyers will have to deal with, more and more semiconductor companies need to reevaluate risk—and that could mean fragmenting their supply chain or other components of the product cycle.

The prudent approach for semiconductors companies and adjacent industries, is to focus on long-term growth trends beyond 2020 when considering their M&A strategies. The high-tech industry as well as key industries that semiconductors serve are fast-forwarding into the future with investments in technology, looking to use semiconductors as a bolt-on or catalyst for growth now.

With increased regulatory challenges tightly governing transactions between semiconductor companies, compounded by the pressure to stay ahead of the curve in a highly competitive environment, semiconductor companies need to adapt their M&A strategy to make investing in high-growth areas and technologies a bigger part of their inorganic growth agenda. In doing so, semiconductor companies will be able to acquire companies and technologies that can elevate their market position in automotive, 5G, IoT, and AI offerings and help them become integral players in the biggest trends shaping the world today and in the future.

¹ Bloomberg Intelligence
² Semiconductor Industry Association
³ Gartner
⁴ IHS Markit