After Slump, Semiconductor Industry Eyes Mergers
dailynews.yahoo.com
Saturday March 27 1:03 AM ET
After Slump, Semiconductor Industry Eyes Mergers
By Therese Poletti
SAN FRANCISCO (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. (Nasdaq:INTC - news) has announced the industry's biggest deal ever, the $2.2 billion
acquisition of networking chip maker Level One Communications Inc. (Nasdaq:LEVL - news) .
''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. (Nasdaq:VLSI - news), already is the target of a hostile $777 million takeover offer from Dutch
electronics giant Philips Electronics .
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. 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. (NYSE:LSI - news) agreed to buy Fremont, Calif.-based SEEQ Technology 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. (NYSE:CY - news) 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. and
possibly Irvine, Calif.-based Broadcom Corp. (Nasdaq:BRCM - news), 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. (Nasdaq:AMAT - news), 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.'' |
