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Ian/from street.com
Chipmaker Acquisitions Are Becoming
Absolutely 'Fabless'
By Marcy Burstiner
Staff Reporter
6/14/99 8:00 PM ET
SAN FRANCISCO -- In the old days, a semiconductor
company worth its silicon battled against competitors on its
own. Rarely did one company buy another to gain market
share. For one thing, integrating giant, costly fabrication
plants was difficult.
But already this year dozens of chip companies have
announced acquisitions. While numbers for chip mergers,
many of which involve small privately held companies, are
hard to gather, the trend is apparent in several deals that are
huge by chip standards: Intel (INTC:Nasdaq) will pay $2.2
billion to purchase Level One Communications
(LEVL:Nasdaq) and Philips Electronics paid about $1 billion
to gain control of VLSI Technology (VLSI:Nasdaq), for
example.
"Clearly things are changing," says Phillip Salsbury, CEO at
Seeq Technology (SEEQ:Nasdaq), an 18-year-old network
chipmaker that is being acquired by LSI Logic (LSI:NYSE)
in a stock swap valued at $100 million. "In the technology
area you have to demonstrate growth. It has become a very
accepted strategy now."
Some Semiconductor Acquisitions
Acquirer
Target
3DFX Interactive
STB Systems
8x8
Odisei
Altera
Boulder Creek Engineering
Applied Materials
Obsidian
Broadcom
Maverick Networks, Armedia
Technology, Epigram
Integrated Device
Technology
Quality Semiconductor
Intel
Level One, Dialogic, Williams
Lattice Semiconductor
Vantis
LSI Logic
Seeq Technology
Royal Philips Electronics
VLSI Technology
STMicroelectronics
Vision Group
Texas Instruments
Telogy Networks, Integrated
Sensor Solutions
Vitesse Semiconductor
XaQti and Serano Systems
Edward Leonard, managing director of M&A firm Broadview
Associates, said the spate of mergers is a result of the first
upturn in the semiconductor industry since it switched over
to a "fabless" model -- the practice of contracting out
manufacturing. By the time the model firmly took hold in the
mid-'90s, chip stocks had collapsed. With the surge in chip
stocks that began Oct. 8 of last year, chip companies now
have the cash and lucrative stock value to make purchases.
And because many companies are fabless, they are less
costly to buy and much easier to integrate, he says.
"The old-line semiconductor mentality that you can't do this
is gone," he says.
At the same time, says Salsbury, technology is changing
fast and big companies have realized they can acquire new
designs faster by buying them rather than developing them
in-house.
Salsbury originally came out of Intel and helped found Seeq
back in 1981 with a few million dollars in venture capital and
a handful of employees. That's all that was needed in those
days to open a fabrication plant and start pumping out chips.
You created your own manufacturing process that
differentiated you from your competitors. That formed a
barrier against mergers, because the processes were
incompatible. Once companies went fabless, however,
companies began creating designs that were more "portable"
and able to be manufactured anywhere.
Meanwhile, he says, the customer base has consolidated.
To hold on to a customer like Cisco (CSCO:Nasdaq) now
you have to be able to guarantee a much larger volume of
products than in the past, he says. And that was something
Seeq was finding it harder and harder to do.
The first sign that things were changing, Leonard says, was
Intel's purchase of graphics chipmaker Chips &
Technologies in late 1997. Once people saw Intel making
acquisitions, it shifted the industry mindset. It was about that
time that his M&A boutique started doing semiconductor
deals, he says.
Now, increasingly chip companies are finding that to prosper
they have to diversify. No longer can companies like Intel
exist on one key product. Diversification was a key reason
that chip equipment maker Applied Materials
(AMAT:Nasdaq) announced late last month it would buy
Obsidian for $137 million, says Kenton King, an M&A
attorney in the Silicon Valley office of Skadden Arps
Meagher & Flom, which handled the deal. "It's a way for
Applied to fill out their product lines," he says.
But despite all the reasons behind the shift toward mergers,
the change surprises the old timers like Leonard and
Salsbury. That's because the industry historically has been
defined more by big egos than big companies. Many chip
companies are still run by their founders decades after their
inception: W.J. Sanders of Advanced Micro Devices
(AMD:NYSE) is still at the helm after 30 years, Alfred Stein
has headed VLSI since founding the company 20 years ago
and, at LSI Logic, Wilfred Corrigan is still CEO 18 years after
he started that company.
But now egos are giving way to commercial realities, Leonard
says. "Today's deals are more about the shareholders than
the CEO."
Acquisitions are becoming so accepted now, that they are
planned even in the early financing stages of a start-up.
"Smaller companies are starting now with an ultimate exit
strategy that's not necessarily through an IPO," King says.
"Your goal may no longer be to be the next Intel but to be
bought by Intel |
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