I found this discussion from In-Stat interesting in the effect it could have on semiconductor capital equipment spending. Do you see this trend of consolidation hurting demand?
Regards, Mark
Consolidation Inevitable in Chip Industry
By Grant R. Johnson
From Electronic News--April 12, 1999
Chipmakers each holding six percent or more of the total forecasted $143 billion chip market in - roughly top 10 semiconductor manufacturers - are likely to remain prosperous while the middle-tier players without the economies of scale or cutting edge technologies will gradually fade from the scene. While rapid advancements in the chip market favor both the largest and the smaller, specialty/niche players, the smaller companies are dependent on the distribution channels controlled by the larger players. Likewise, the larger companies seek the cutting-edge technologies offered by specialty players. Industry leaders that have traditionally benefited from the commodity chips used in PCs are now being lured by the higher margin returns on more specialized ICs in newly emerging markets. But as companies become more desperate to find avenues into hot markets in communications and networking, mergers offer a win-win solution since there will not be enough market space for the 200 or so semiconductor vendors to prosper going forward.
In addition to the surge in acquisitions by the leading semiconductor vendors, the chipmakers in the middle will also scramble to find partners over the coming year to ensure their survival. Along with consolidation in the industry, the shift towards more foundry services will intensify, as the traditional fully-integrated semiconductor manufacturers continue to outsource to cut manufacturing costs. The primary drivers to merging fit in well with the changing dynamics of the semiconductor market.
Driver 1: Over-capacity
This has been the leading culprit of the historic downturn over the past three years. As is the case with automobiles, building materials, chemicals, financial services, etc., chip fabs and foundries have the capacity to crank out far more chips than the market can absorb. The result: brutal price wars and a tanked memory device market that spread to most other product groups. The encouragement of more end-use electronics growth and declines in new fab activity should bring the demand for chips back in line with supply during 1999. Overcapacity has been a permanent fixture in the boom and bust cycle of the chip industry, but stockpiling to meet peak demand is no longer efficient in this day of just-in-time resource planning. Consolidation would help to eliminate chip supply as chipmakers are forced to slash costs and swallow rivals.
Driver 2: Technology and Economies of Scale
With each new generation of chip products, the costs of constructing fabs have risen from a few hundred million dollars to over a billion dollars. Each new generation will require more complex and costly production methods and technologies and the $2 billion dollar fab is just around the corner. Interestingly, it took thirty years to reach the $1 billion fab level but only will require a couple years to reach $2 billion. A $200 billion chip industry by 2000 is enticing but many companies are now questioning the how deep their pockets must be to compete. Companies with existing fabs are more willing to outsource their production to foundries and to seek more consolidation in order to spread increasing production costs more evenly across the industry. Without consolidation and partnering, several chipmakers will throw in the towel, unable to finance the costs required to build a new fab.
Driver 3: Cash and Capital
The free flow of capital around the globe in search of the most lucrative returns dictates that more efficient matches among chip partners will be arranged. Global capital seems to be the driving force behind the recent round of global mergers and this is especially the case in semiconductors. International financiers will not be able to turn away from the opportunities presented by a market expected to deliver double-digit returns over the next several years.
Driver 4: Complimentary Product/Service Offerings
Chip companies are seeking to create more complete portfolios to meet more diverse demands. This includes acquiring the latest generation IC Intellectual Property (IP) or technologies. Intel's recent M&A activities exemplify the benefits of combining distinct lines in order to become more of a one-stop shop. The chip merger wave continued to swell with Intel's recent acquisition of Level One, a strategy that will give the world the largest silicon building blocks required to supply the increasing demands of the Internet and electronic commerce. Intel's largest such acquisition ever filled a market segment void by offering the critical mass for Intel to become a leading silicon supplier for networking systems. Intel merged with Shiva Corporation in early March, a move that will supplement Intel's line of networking hubs and adapter cards with Shiva's remote-access and VPN products. While allowing Intel to provide a greater product mix to IT managers, such maneuvers should also decrease production costs for remote-access and VPN gear as Intel is able to apply its volume production capabilities to a broader range of specialty products.
The benefits of consolidating among chipmakers have become more vivid and the seeds have been planted. According to Broadview Associates, 1998 saw 71 deals in the chip industry accounting for $5.9 billion versus only 44 deals at $3.3 billion in 1997. Expect merger activity in the chip industry to reach record levels in 1999.
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