After slump, semiconductor industry eyes mergers
REUTERS - 19:52 03-25-99
SAN FRANCISCO, March 25 (Reuters) - 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.
Already this year, Intel Corp. <INTC.O> has announced the
industry's biggest deal ever, the $2.2 billion acquisition of
networking chip maker Level One Communications Inc. <LEVL.O>.
"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, Calif.
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 merger total.
Last year was a banner year for industry mergers, with 71 deals
in 1998 valued at a total of $5.9 billion versus 44 deals in 1997
valued at $3.3 billion, according to figures compiled by Broadview
Associates of Fort Lee, N.J.
Many semiconductor companies are looking to mergers to compete
in high-growth areas such as wireless, communications and
networking, or to add manufacturing without plunking down the
$1 billion in cash needed to build a new chip factory.
"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.
Indeed, VLSI Technology Inc., <VLSI.O> already is the target of
a hostile $777 million takeover offer from Dutch electronics giant
Philips Electronics <PHG.AS>.
San Jose, Calif.-based VLSI, 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.
Among other deals, Applied Micro Circuits Corp. <AMCC.O> of
San Diego, Calif., moved this month to expand its market for
high-speed communications products when it said it would buy
Cimaron Communications Corp. for $115 million in stock.
Last month LSI Logic Corp. <LSI.N> agreed to buy Fremont,
Calif.-based SEEQ Technology <SEEQ.O> in a stock swap valued
at $100 million. Milpitas, Calif.-based LSI hopes to add a
layer of fast networking technology to its specialty chips.
Long-struggling Cypress Semiconductor Corp. <CY.N> of San
Jose said in January it would buy IC Works Inc. 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. He 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," Glavin said.
Analysts said a few networking and high-speed communications
takeover candidates include Galileo Technology Ltd. <GALTF.O>
and possibly Irvine, Calif.-based Broadcom Corp. <BRCM.O>,
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 Inc., 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 & Co. 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."
o~~~ O |
