By Rahn Amitai, Vice President at JD Merit
The unprecedented times we are living in has not skipped over the semiconductor and advanced technology manufacturing industries. An amazing confluence of factors, years in the making, and 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 not spare companies of any size and will affect the path forward for everyone. FabExchange and JD Merit are here to help business owners navigate these waters and achieve their goals and objectives in a complex world.
Let’s take a look at some of the different factors dominating the industry:
1.Wave of Consolidation
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 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, attracted by the prospects of rising profitability and looking to participate in the benefits of the economies of scale that consolidation brings, is increasingly turning its eye to the semiconductor middle-market as well. 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 three factors:
Historic Demand –
The roll-out of 5G smartphones and related infrastructure, the continuing trend of increased semiconductor and electronic component in automobiles, and the ever-increasing consumer demand bolstered by the impact of COVID response and the “Work-From-Home” economy have created historically high demand for chips.
The semiconductor industry has been unable to meet this critical demand. The effects are being felt acutely as automakers are reporting critically low inventory in this supply resulting in decreased production of automobiles. 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.
Search for Differentiation –
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.
3.Geopolitical Concerns Dominate
Per Accenture’s report, between 2013 and 2015 only three M&A deals in the US were blocked or restricted as a result of government or regulatory intervention. 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 the most pressing 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.
3.Government Support on the Horizon?
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. 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. President Biden has signed an executive order 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 and 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… it’s a unique and critical time to be involved in the semiconductor industry! With the changes that have occurred in the past several years in society’s relationship to and demand for technology (exacerbated by the effects of COVID), there are clearly strong tailwinds and growth opportunities in a dynamic industry.
However, these positive influences can be difficult to navigate and are tempered by complications. The movements of the large actors in the industry will reverberate to the middle-market, and the decisions of governments and their agencies will affect all. Growth opportunities require capital and strategic partners to execute, and there are sensitivities in choosing just the right partner or target. For those looking to maintain, it requires constant vigilance and flexibility to steer through the macroeconomic forces at play. How should an owner navigate this web of influences to achieve their goals?
FabExchange and JD Merit have extensive experience in this space, working with owners to realize their business’ asset and capital objectives efficiently and effectively. With expertise in hard asset acquisition and disposition, effectuating M&A transaction and advisory, capital raising, and a foremost expert on semiconductor IP valuation as a member of the team, we are well-positioned to serve as your trusted advisor and help you navigate a complex world. Regardless of ambition or size, lean on experts and leverage our experience and expertise to achieve your goals.
We would appreciate the opportunity to discuss how the specifics of your business and how we may bring our asset, M&A, capital raise, and advisory services to your benefit. Please reach out to Shaun Flynn, Director for Development and Strategy at 408-560-2900 or to Rahn Amitai, Vice President, at 206-335-5140 or by email at Rahn.Amitai@JDMerit.com to schedule a confidential discussion.