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With the biggest year in chip deals since 2000 not even halfway through, mid-sized semiconductor makers appear to be prime takeover targets, as the largest players look to round out their capabilities and turn their focus to chips for cars, watches and other devices, making the “Internet of Things” a reality.
‘Bigger is better’ is the new mantra, as more technologies are being squeezed into chips and customers want to deal with integrated suppliers that can offer the broadest range of products.
“You want to be the supplier that has the most capability,” said Ernie Ruehl, Managing Director at Credit Suisse.
Credit Suisse advised NXP Semiconductors on its deal with Freescale Semiconductor, which kicked off the current wave of chip mergers in March, and was one of the advisers to Avago Technologies in its $37-billion deal for Broadcom Corp last week.
“A leading-edge design can cost $150 million to $200 million, which means that you have to be able to generate four times the revenue to get a return on investment,” said Mario Morales, an analyst at tech research firm IDC.
In demand Companies that make analog and mixed-signal chips – a mixture of analog and digital – are in demand, analysts said. Analog chips process real-world signals such as sound and light, so they are central to smartphones and devices connected to the Internet.
As a result, companies like Maxim Integrated Products Inc, Linear Technology Corp, Intersil Corp, Silicon Laboratories Inc, Analog Devices Inc and M/A-COM Technology are under the spotlight.
Microcontrollers Another closely related sub-sector is of microcontrollers — small computers used in automatically controlled products like car engines or implanted medical devices.
The big chip makers, such as Intel Corp, Texas Instruments Inc and Qualcomm Inc, want to beef up in just those areas. As a result, valuations are growing, but not out of line with technology in general. But high valuations have not stopped the pace of deals or the premiums companies are willing to pay as low interest rates provide a source of cheap capital.
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