Diversification set to drive consolidation

In the previous part of this series, we observed that huge manufacturing costs, a slowdown in revenue growth, and declining personal computing shipments are driving consolidation in the semiconductor industry.

According to World Semiconductor Trade Statistics, growth in the global semiconductor market is expected to moderate at 3.4% in 2016 and 3% in 2017. While the slowdown in global demand for personal computers will put downward pressure on the overall growth of the semiconductor industry, increasing demand for IoT (Internet of Things), wireless networks, tablets, automotive applications, and mobile should drive growth. And the urgent need to diversify in the mobile and IoT spaces is likely to speed up M&A (merger and acquisition) activity in the industry.

Consolidation in Semiconductor Industry Could Gain Momentum

Consolidation in the semiconductor industry in 1H15

As shown in the above graph, the value of M&A deals in 1H15 alone stood at $72.6 billion, more than four times the value reported in fiscal 2014. Three major acquisitions accounted for 90% of the value:

  • Freescale (FSL) acquired NXP Semiconductors (NXPI) for $11.8 billion
  • Avago (AVGO) acquired Broadcom (BRCM) for $37 billion
  • Intel acquired Altera (ALTR) for ~$16.7 billion

Potential consolidation targets

The current wave of M&As makes potential targets out of chip companies that serve the industrial, automotive, mobile, and storage spaces. According to Wall Street Daily, Xilinx (XLNX), Atmel (ATML), Maxim Integrated Products (MXIM), Cavium (CAVM), Lattice Semiconductor (LSCC), M/A-COM Technology Solutions Holdings (MTSI), and Skyworks Solutions (SWKS) could be potential acquisition targets.

Intel makes up 18.93% of the VanEck Vectors Semiconductor ETF (SMH).

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