Technology

A semiconductor mega-merger

microchip, german semiconductor industry, qualcomm broadcom
Everybody needs chips. Source: mauritius images

The best years of the semiconductor industry are still to come: In a few years, billions of electronic devices will be connected to the internet, from autonomous cars to coffee makers. And each one of them will need ever more powerful microchips.

Singapore-based microchip maker Broadcom is steeling itself for the Internet of Things with an extraordinary offer of $130 billion for American rival Qualcomm, the world’s largest maker of mobile phone microchips. It would be the biggest tech acquisition of all time, and the drama could create more excitement about European microchip makers.

Investors consider Munich-based Infineon a top candidate for a takeover; the company’s stock price hit its highest level in 16 years on Monday. With a worldwide market share of just over 10 percent, Infineon is the No. 2 player in the auto chip industry behind Dutch NXP.

“This is a well-thought-through exercise in terms of the transaction.”

Anand Srinivasan, Bloomberg Intelligence analyst

“European companies are very well run, very efficient and with good auto exposure,” says Anand Srinivasan, a senior technology analyst with Bloomberg Intelligence. “ST Microelectronics has a new imaging product that is seeing some strong sales in the last quarter. Infineon’s power business is very strong. Structurally, their margins could be improved, and that is the opportunity.”

The global semiconductor industry is likely to top $400 billion in sales in 2017, according to Gartner, an increase of almost 17 percent from last year. It has been consolidating via takeovers to counteract dwindling growth and save on research and development costs. Developing microchips for the automotive industry has been a particularly bright spot; electronics industry association ZVEI predicts that sales of microchips used in cars will increase worldwide from just under $40 billion in 2016 to more than $51 billion in 2021.

In the Qualcomm deal, the target is valued at about $105 billion, and Broadcom would also take on $25 billion in debts. Broadcom is offering $70 per share of Qualcomm, 28 percent over the stock price from Nov. 2, the first day takeover rumors started swirling. The expanded Broadcom would have total annual revenue of about $51 billion, putting it neck-and-neck with world leaders Intel and Samsung.

Hock Tan and Donald Trump, microchip, semiconductor industry, qualcomm broadcom
Coming to America. Source: AP

But it’s not actually a two-company deal, it’s a four-company deal. Broadcom has been trying to buy American firm Brocade Communication Systems since last November, but the Committee on Foreign Investment in the US (CFIUS) has not yet approved the $5.9 billion deal. And Qualcomm’s is actually working to buy NXP, the biggest semiconductor company in Europe, for $47 billion. That deal has been under review by EU officials since October 2016.

NXP “might end up being one of the crown jewels for Broadcom,” says Mr. Srinivasan. “In the interim between now and the potential deal close, you might have opportunities for Infineon or NXP to gain market share.” He thinks the Broadcom-Brocade deal will close this year and the Qualcomm-NXP deal could be done in the first quarter of 2018.

Before the Broadcom-Qualcomm deal goes through, it needs to win approval from shareholders and the American government. At the White House last week, CEO Hock Tan preemptively announced plans to move Broadcom’s headquarters to San Jose, Calif., which could help. The US government doesn’t care for foreign companies gobbling up domestic firms. When Infineon tried to acquire US competitor Wolfspeed for $850 million earlier this year, the Americans vetoed it on grounds of national security. Wolfspeed makes chips used in electric car charging technology.

“It is a conglomerate assembled in a very aggressive way. It’s remarkable how efficiently it has worked out,” Mr. Srinivasan says of Broadcom, which was formed in 2016 when Avago Technologies acquired the Broadcom Corp. for $37 billion. “The company is not unwilling to let go of segments it thinks are non-core. This is a well-thought-through exercise in terms of the transaction. The success of the Broadcom-Avago acquisition should be an indicator.”

Joachim Hofer covers Adidas and other major German companies for Handelsblatt out of Munich. Grace Dobush is an editor for Handelsblatt Global based in Berlin. To contact the authors: hofer@handelsblatt.com and grace.dobush@gmail.com

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