Semi M&A: How to extract value from smaller deals

If you get the impression that M&A transactions in the semiconductor industry have gotten smaller in recent years, you’re right—the semiconductor industry is trending toward smaller deals. In fact, according to Accenture’s analysis, 8 out of 10 transactions in the past 5 years were less than US$1 billion in transaction value (Figure 1).

What is causing this trend? Mostly, it’s because the environment has been hostile toward bigger deals. For instance, from 2016 to 2018, government intervention and regulatory restrictions led to a 5X increase in transactions that were blocked or lapsed, while global geopolitical tensions in 2018 also contributed to a significant reduction in global M&A transaction value. More recently, select megadeal opportunities have emerged even as the effects of COVID-19 continue to exacerbate global chip shortages—but we expect these larger deals will face similar geopolitical constraints, making smaller transactions an attractive alternative.

All of this raises an important question: If smaller semiconductor deals persist, and there is less margin for error for corporate development teams to meet their investment objectives, how can acquirers maximize value from each transaction? In our view, executives need to scrutinize each prospective deal to determine why and how individual targets could help achieve their collective goals—whether that’s to move “up the stack” by optimizing lifecycle analytics through cloud computing and acquiring design automation capabilities; develop “solution sales” capabilities; pivot to “higher margin” business unit emphasis; or invest in value-added software offerings for downstream customer applications.

When evaluating targets, acquirers should consider three key dimensions: technology advantage, process evolution, and people infusion. Let’s take a closer look at each.

Technology advantage

1. Markets served:
   • Market size & growth potential
   • Competitive intensity
2. Competitive position:
   • Financial performance
   • Customer relationships
3. New capabilities:
   • Technical complements

Process evolution

1. Value creation potential:
   • Strategic synergies
   • Speed to extract value
2. Product enhancements:
   • Operational improvements
   • Functional capabilities

People infusion

1. Availability & affordability:
   • Innovative talent
   • Downstream industry knowledge
   • Integration complexity

Technology advantage

In semiconductor M&A, the name of the game primarily is to gain new technologies to expand or enhance the product portfolio. For example, among established companies, around 35% of high-tech acquisitions are primarily motivated by filling specific product-related voids. Large players are racing toward the next generation of inputs (e.g., chips, batteries, etc.), so they can deliver the next generation of outputs (e.g., cars, devices, etc.).

Qualcomm’s recent acquisition of Nuvia is an example of how a smaller player may “develop leading performance as on-demand computing increases in the 5G era.” Analog Device Inc.’s acquisition of Maxim Integrated allowed ADI to increase its market size and growth potential, and is expected to help ADI sell through new channels and increase its customer base—especially within the automotive and data center markets. Furthermore, in highly specialized areas, such as Xilinx’s software development, acquiring a company may simply be less costly than developing in-house.

If technology advantage is the driving factor for a deal, acquirers can ensure their pre-close planning defines how the new tech stack will complement existing functions or run as a new entity. The fundamental rule to keep in mind here is, “Don’t disrupt what’s working today.” To that end, it’s critical to preserve existing sales channels as well as the brand capital that both ParentCo and TargetCo have developed over time.

Process evolution

In addition to investing in transformational technology (a long-term play), semiconductor companies are transforming the way they work (a short-term play)—using M&A to acquire technology capabilities or physical assets that can help them optimize their operations to become more competitive. This includes both internal processes such as performance management and salesperson incentives, as well as structural operations such as real estate footprint and digital marketplaces. For example, like many other high-tech firms, semiconductor companies are moving away from selling widgets (chips) to selling software-as-a-service (SaaS)—and that requires new sales capabilities and tools.

Some companies also are on the hunt for capabilities that can help them shore up their supply chain. As pipeline growth slows, semiconductor companies need to scale raw material sourcing for immediate production or storage for product delivery. For instance, in the face of current chip shortages, some semiconductor companies are purchasing fabs to secure production capacity. That’s what Chinese-owned semiconductor company Nexperia did, snapping up the United Kingdom’s largest fab, Newport Wafer Fab. The deal will enable Nexperia to become more independent in production relatively quickly—avoiding the years of lead time required to build a new fab itself.

People infusion

Finally, some market players continue to pursue transactions that are primarily motivated by human capital—the need to infuse new talent and expertise. That’s especially true today, as semiconductor companies increasingly need a workforce that’s trained in software engineering, AI, and big data techniques, in addition to standard, core engineering skills. Acquiring the right talent can deepen industry knowledge, help transform a brand, and improve overall collaboration.

Regardless of the deal thesis, the priority here it to avoid culture shock and minimize attrition—if you’re buying a target for its people, the last thing you want to see is acquired talent leaving. Firms must have a tailored plan to assimilate culture and maintain momentum throughout the integration execution timeline. This should include vesting incentives that are aligned with the company’s transformation goals and providing autonomy to TargetCo leadership. It’s also helpful to use a fit for purpose approach to talent and to proactively gauge how well the acquired employees are adapting to the change using surveys and analytics to identify and head off potential problems.

As mounting regulatory complexity and industry consolidation shift megadeals out of the M&A spotlight, we can expect smaller and more strategic semiconductor transactions that might be a key driver of growth in the short term. That means acquirers need to think much more carefully about the targets they pursue, why they’re pursuing them, and what they need to do to get the most value from deals that offer precious little margin for error.