Semiconductor mega-deals

The Chips Are Up

chipmaker pic f1online
The devil is in the detail, not just with semiconductors, but takeovers too.
  • Why it matters

    Why it matters

    European chipmakers, once a major force in the industry, are having to line up major acquisitions to buy back market share.

  • Facts

    Facts

    • The global chipmaking industry grew by an average of 15 percent a year between 1980 and 2000, but growth has since fallen.
    • In 2014, E.U. chipmakers generated just 9 percent of global sales; South Korea alone provided 17 percent.
    • As well as Dialog, chipmakers Infineon and NXP have also recdently acquired large U.S. rivals.
  • Audio

    Audio

  • Pdf

First it was Infineon, then NXP and now Dialog Semiconductor. Europe’s chipmakers are on a shopping spree in the United States. After years of dwindling sales, the European semiconductor sector is switching to the offensive.

Dialog, which was founded in Germany but now has its headquarters near London, announced at the weekend that it is buying U.S. competitor Atmel for €4.6 billion (€4.1 billion). The company – a major supplier to Apple – is using the acquisition to expand its customer base.

A wave of takeovers has been underway in the chip industry for some time, but European manufacturers had not been involved until now. NXP, based in the Dutch city of Eindhoven, is in the process of acquiring U.S. competitor Freescale for $12 billion. Last summer, Munich-based Infineon acquired U.S. rival International Rectifier for €3 billion.

The European chip industry has had a tough few years. In 2014, E.U. producers generated just 9 percent of global sales. South Korea alone was responsible for 17 percent.

There is a good reason why semiconductor produces are merging. Growth in the industry leads to predatory competition. The industry grew by an average of 15 percent a year between 1980 and 2000. Growth rates have declined since the turn of the millennium, with industry association ZVEI estimating an additional increase of about 6 percent in the last few years.

Those who can afford it are expanding their market share through takeovers, as Dialog has just done.

Analysts with the Gartner market research firm expect 2 percent growth this year. Those who can afford it are expanding their market share through takeovers, as Dialog has just done.

The company has had its headquarters in Reading outside London for a few years, but its heart still beats in the Swabian town of Kirchheim, where engineers develop chips primarily used in the iPhone.

The company derives enormous benefit from having Apple as a major customer. Second-quarter sales increased by 44 percent over the previous year, to $316 million. Income has increased almost tenfold in the past seven years.

Given its impressive numbers, the British-Swabian alliance was long popular on the stock exchange in Frankfurt, where the share price more than doubled within a year. But investors feel that the mega-acquisition of Atmel is too expensive, and the company’s share price declined by a quarter on Monday.

Analysts, on the other hand, see the acquisition in a positive light. “The takeover makes sense, because it will make Dialog more diversified,” said officials at DZ Bank. Sales attributable to Apple will fall from 70 percent to about 40 percent.

The purchase price is reasonable, according to the bank, which noted: “A few other transactions in the semiconductor segment were substantially more expensive.”

Dialog offered $10.42 per share, a markup of 43 percent over the closing price on Friday. By comparison, Infineon paid over 50 percent more for the shares in International Rectifier.

But there are no longer any bargains in the sector. Dialog wasn’t the only company interested in buying Atmel; there was also interest from China.

Dialog chief executive Jalal Bagherli believes that the takeover makes the company well prepared for the future. “The computer era is over, we are at the height of the mobile communications boom, and the Internet of things is next,” he said, referring to the increasing trend for hooking up appliances to the Internet.

It seems that from Infineon to NXP and Dialog, European semiconductor manufacturers are willing to take on industry giants like Intel, Samsung and Qualcomm.

 

Joachim Hofer covers the high-tech industry and IT sector for Handelsblatt. To contact the author: hofer@handelsblatt.com

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