September 27, 2016
Semiconductors form the foundation of virtually all tech industries.
The worldwide revenue of the semiconductor industry is expected to reach $341 billion this year, increasing almost $200 billion since 1996. When applying a modest 3-4% compound growth rate, the average revenue in a few years could reach $1 billion per day.
Such rapid, continuous growth shows how vital semiconductors are to the success of high tech companies. Further, it establishes semiconductors as the bellwether in the rise of the high tech industry, which is quickly becoming a key driver of the U.S. economy overall.
In the last year and a half, since the start of 2015, the industry has seen a spate of new deals and mergers totaling more than $150 billion in the U.S. alone. The latest acquisitions include Analog Devices announcing it will acquire Linear Technology to strengthen and complement its product portfolio for entering new end-applications, and Avnet is set to acquire Premier Farnell to increase its digital footprint worldwide while simultaneously extending its supply-chain services. The chart below shows the major deals from both private and public companies since March 2015. Not mentioned in the chart is the latest acquisition of UK-based ARM by the Japanese conglomerate Softbank for $32 billion.
Why M&A, and Why Now?
The market mandate for companies today is about driving growth. It used to be ‘organic’ double-digit growth, but companies have been struggling to sustain and show even high single-digit growth. Recent trends like Cloud Computing, Big Data, Internet of Things (IoT), Wearable Tech, Smart Homes, and Smart Automobiles continue to drive incremental revenue, but overall growth has been modest.
As a result, the quickest way towards substantial ‘inorganic’ growth is through M&A. Whether the company is acquiring new I.P., adding highly complementary product portfolios, planning substantial cost reductions from consolidation, increasing operational scale, or gaining market share in fast-growing niches, enterprises are opening themselves up to a host of new considerations that must be taken into account to make success a possibility.
The Path to Post-Merger Success
First and foremost, the gold star for enterprises in the semiconductor industry—regardless of whether the company is IDM (like Intel, Micron), fab-lite (AMD), or fabless (Qualcomm)—is their product. Once the deal is complete, the business must first rationalize the longer list of product families and product lines available to a more diverse customer base in additional regions. The redundant ones needs to be End of Life’d after carefully looking at the customer purchasing patterns and the right differentiation must be created amongst the product lines to gain synergies for new markets and end use applications.
But it does not stop there. The Sales team also needs to be more efficient and effective since they have a plethora of new products to sell with tremendous cross-sell opportunities at the time of interacting with their customers. Sales teams needs to start thinking about all the components that can go into a ‘motherboard’ rather than selling a component only for a specified end-use.
These factors have an immediate impact on reducing the cost, the reduction of which inevitably becomes a top priority. The logical step in this process is to remove redundant product lines from the system and enable the Sales team to sell more effectively. To analyze how much benefit a company can derive from reducing costs and selling products at the price it deserves we must look at the profit equation for a typical semiconductor industry, which we will look at in Part II of this series next week.