Merger wave expected in chip industry
news.com
By Reuters
Special to CNET News.com
March 25, 1999, 5:45 p.m. PT
The $126 billion semiconductor industry is ripe for a wave of mergers after
suffering its longest-running slump, with this year's deals likely to set a record,
analysts and investment bankers say.
Last year was a banner year for industry mergers, with 71 deals valued at a total of $5.9
billion. In 1997 there were 44 deals valued at $3.3 billion, according to figures compiled by
Broadview Associates of Fort Lee, New Jersey.
Already in 1999, Intel has announced the industry's biggest deal ever, a $2.2 billion
acquisition of networking chip maker Level One Communications. By itself the Intel
deal--the largest in its 31-year history--would take the industry more than a third of the way
toward last year's record total.
Many semiconductor companies are looking to mergers to compete in high-growth areas
such as wireless, communications, and networking, or to add manufacturing capabilities
without plunking down the $1 billion in cash needed to build a new chip factory.
"We are in the beginning stages of a consolidation in the semiconductor space," said John
Marren, a managing director at Morgan Stanley Dean Witter in Menlo Park, California.
"Scale becomes first and foremost, and if you are going to be a manufacturer of chips, you
need to have scale or critical mass to compete with the big guys," Marren said.
The ever-increasing popularity of wireless phones, personal digital assistants, and other
gadgets will make the networking and communications
industries two of the hottest areas for deals, analysts say.
This year, a slew of deals are in the works already, many
focusing on these high growth areas.
VLSI Technology is the target of a hostile $777 million
takeover offer from Dutch electronics giant Philips
Electronics. The San Jose, California, company, which
makes chips for wireless communications and computer
networking, is likely to be bought by either Philips or another
company looking to enter the fast-growing wireless market.
Elsewhere, Applied Micro Circuits of San Diego, California,
moved this month to expand its market for high-speed
communications products when it said it would buy Cimaron
Communications for $115 million in stock. Last month LSI
Logic agreed to buy Fremont, California-based SEEQ
Technology in a stock swap valued at $100 million. Milpitas,
California-based LSI hopes to add a layer of fast networking
technology to its specialty chips.
Long-struggling Cypress Semiconductor of San Jose said in
January it would buy IC Works in a $100 million stock deal to
expand into the wireless market and reduce its dependence
on the highly cyclical memory business.
"There will be more consolidation within the industry," said
Charles Glavin, a CS First Boston analyst.
Glavin said he was not surprised by the hefty 80 percent
premium Intel paid for Level One, but was a bit taken aback
that such a high premium came so early in the consolidation
cycle. "We thought this kind of premium would be paid later
in the cycle," he said.
Other networking and high-speed communications takeover
candidates include Galileo Technology and possibly Irvine,
California-based Broadcom, which is making some
acquisitions of its own. In January Broadcom, a networking
chip maker, announced a deal to buy Maverick Networks, a developer of chips for network
switching equipment, in a stock deal worth about $100 million.
Mergers also are heating up in the downtrodden $22 billion semiconductor equipment
industry, which makes the million dollar equipment used by chip makers around the world.
Chip equipment firms are slowly turning around, with forecasts that revenues will be flat
this year after dropping last year. The industry slump came amid economic woes in parts
of Asia, home to many big customers.
Barry Newman, senior managing director of NationsBanc Montgomery Securities, said he
had been predicting consolidation in the equipment industry for a few years, but this year
will be one for more mergers in chip equipment, as companies recover from the worldwide
industry slowdown.
"We are in an environment where people are thinking about them," said Newman, who
heads up NationsBanc Montgomery's technology investment banking.
Another factor driving equipment companies to merge is competition with the world's
largest equipment maker Applied Materials, which offers entire solutions to many steps
involved in the complex 12-sequence chip manufacturing process, while most equipment
makers offer one or two products at the most, SG Cowen & Company analyst Min
Pang said.
"There were 29 deals in this space last year and there are already 12 this year
[through February]," Pang said. "It's incredible. It's not very visible because these
are not very large companies. But these things are already happening." |
