The major semiconductor industry consolidations of the last year or two were, in general, were NOT driven by a desire for greater economies of scale, as I explained in two preceding articles (part 1 and part 2. Yet, while the actual number of acquisitions in the semiconductor industry remained relatively flat over the past six years, the growth in the magnitude of the value of these acquisitions has been incredibly large. If not broad economies of scale, what are the driving forces?
Economies of scale can also be achieved by building a larger concentration of revenue in specific market applications. This is a traditional reason for mergers and acquisition and was clearly a benefit in recent semiconductor mergers. Intel’s acquisition of Altera and AVAGO’s acquisition of Broadcom drive synergies of scale in the data center. NXP’s acquisition of Freescale strengthens already strong positions in automotive and security semiconductors. But these economies of marketing, sales and R&D are typical of the driving forces for mergers in all industries at all times. Mergers of this type consolidate revenue for a specific application in fewer companies but do not necessarily lead to overall consolidation of an industry like semiconductors.
Another obvious force for semiconductor industry consolidation is liquidity. Cash is available in large quantities at low cost with long term financing. Almost any acquisition of a profitable company can be accretive to earnings for the acquirer. Traditional banks have become more conservative because of the new restrictions of Dodd Frank but there are many other sources of borrowing, like private equity, that reflect conditions in the free market.
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Article from Walden Rhines, Chairman & CEO, Mentor Graphics, EE Times