Chip Merger

Struggling for Relevance, Infineon Buys U.S. Rival International Rectifier for $3 Billion

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Infineon chief-executive Reinhard Ploss.
  • Why it matters

    Why it matters

    The purchase of U.S.-based International Rectifier, a maker of chips for small businesses, could help Infineon build the necessary magnitude to compete with bigger rivals.

  • Facts

    Facts

    • Infineon makes chips to manage power in cars, wind power plants, and computers.
    • The German chipmaker is the world’s biggest producer of power chips, according to 2012 figures.
    • Infineon competes with California-based Fairchild, Japan’s Toshiba, Swiss-based STMicroelectronics and others
  • Audio

    Audio

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Infineon’s decision to spend $3 billion (€2.3 billion) to buy a U.S. rival, California-based International Rectifier, is the first sign of a long-predicted wave of industry consolidation in the computer chip business, which has been beset by falling prices and cut-throat competition, experts said.

On its face, the merger of the two companies, which will create a chipmaker with €4.5 billion ($5.9 billion) in annual sales, appears to be complimentary.

Infineon, spun off from German engineering firm Siemens in 1999, makes power regulating semiconductors for cars, industrial electronics and for telecom devices and mobile phones. Its strength lies in high-power, high-voltage products.

International Rectifier makes chips that manage power flow in satellites, aircraft, cars and lighting systems and specializes in lower-power, lower-voltage devices.

The American company is five times smaller than Infineon and has annual sales of $1 billion.

One analyst called Infineon’s purchase costly and shares of the chipmaker, based in Neubiberg, Germany, near Munich, were largely unchanged following the announcement.

But in the first half of this year, the global semiconductor market grew, with revenue of $160 billion through June, an 11 percent increase from the same period a year ago, according to industry figures.

“The barriers to organic entry into this market are high, so this is a rare opportunity.”

Dominik Asam, Infineon CFO

Despite the high price ticket, Reinhard Ploss, Infineon’s chief executive called the move “a one-off chance.”

“The barriers to organic entry into this market are high, so this is a rare opportunity,” the Infineon chief financial officer Dominik Asam told investors in an analyst call.

Infineon expects to expand its product range and its regional operation thanks to International Rectifier’s strong presence in the United States and Asia.

Aside from scope and scale, the deal is promising in terms of technology.

Infineon will also benefit from International Rectifier’s knowledge and innovation. “IR is a leader in gallium nitride and we are pretty good too,” Mr. Asam said. “It’s the combination that’s nice.”

International Rectifier is an advanced manufacturer of gallium nitride on Silicon-based power semiconductors, a chemical compound that improves performance and is a strategically important area for Infineon.

“Gallium nitride could capture more of the semiconductor market, and we are well equipped to cope with this transition.”

“One reason IR is nice is that it’s not a mixed bag where you have to sell half of the stuff you get,” Mr. Asam said. “Everything we are buying there has a good home in Infineon.”

 

Infineon Regensburg wager laboratory in September 2013. Source Bloomberg Guenter Schiffmann
A worker at an Infineon wafer factory in Regensburg, Germany. Source: Bloomberg/Guenter Schiffmann

 

The customers served by the two firms are also complementary.  Infineon is believed to supply chips to automakers and electronics makers, whereas International Rectifier is strong with smaller businesses.

“There will be beneficial cross-selling opportunities,” Mr. Asam said. “International Rectifier has highly competitive package of know-how and control capabilities,” Mr. Asam said. “We are looking for opportunities to stick our chips into their packages – there are good cross selling opportunities.”

The deal is subject to regulatory approval and is expected to be completed at the end of this year or early next year.

The expanded range of products and facilities comes at a price and Mr. Asam said that Infineon would look for synergies and economies of scale.

“We assume we can gain synergies in all cost categories from sales and marketing to infrastructure,” he said.

Mr. Asam said he expected savings in operating expenses to be realized sooner than in manufacturing and also expects savings from research and development.

“Given that development of new products is always becoming more expensive, economies of scale are paramount to drive innovation,” Mr. Asam said.

Some analysts believe these gains could prove elusive and management’s relative lack of experience in large takeovers could be problematic.

“While it is positive that Infineon is turning cash into earnings per share by means of an acquisition, the take-over looks much too expensive – especially as the semiconductor cycle is seen to be rather at a late stage,” Tim Wunderlich, analyst at German private bank Hauck & Aufhäuser, said in a research note.

“Infineon does not have any experience in an acquisition of this size. It’s quite a big risk, and they’re spending all the cash they have,” said a London-based analyst who follows the company but declined to be named. “I don’t think this acquisition makes Infineon any more attractive than it was,” the analyst said.

 

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