Invensense Inc (INVN)

[bud_fox]

Found an interesting article on chip makers and the consolidation and M&A of the sector. Article mentions that any company with under 4 bil market cap is ripe for a merger or buyout. Mentioned the consolidation of Silicon Valley and sensor makers for the internet of things. INVN is doing all the right things and will make us all happy in 2016. I highlighted a couple sections of interest below.

UPDATE: Can the chip sector get even smaller in 2016?
3 hours 49 minutes ago - DJNF

By Therese Poletti, MarketWatch
Opinion: Innovation could be at risk as M&A frenzy continues

The megadeals that roiled the semiconductor industry in 2015 will lead to a seismic shift, and the consolidation of the industry that gives Silicon Valley its name may not be over.

As the number of semiconductor companies falls more quickly than the transistors in chips shrink in size, it will have a big impact on the region where the core underpinnings of electronic devices was conceived. Job cuts, spinouts and an overall revamping of many of the companies are set to remake the $336 billion global semiconductor industry.

The big question, though, is whether innovation will be at risk as companies focus on cost synergies while combining their assets and cleaning house following a series of unprecedented mergers.

"My worry is if the industry is saying 'we are looking for cost synergies,' this is an industry that is focused on innovation," said Bernstein Research analyst Stacy Rasgon. "I find that troubling philosophically. This was driving the industry for 50 years. Is M&A being used as a tool, a defense or as a crutch?"

Nearly $120B in deals in 2015

Chip mergers will hit a record in 2015, as the lower cost of debt, higher manufacturing costs and a maturing industry fueled more than $119 billion worth of deals. That total reflects 23 deals worth more than $100 million, compared with 24 deals in 2014 valued at $24 billion, according to Morgan Stanley.

Industry executives and bankers say the industry needs to consolidate to get stronger. Growth is slowing and the physical limitations in designing thinner and more minute silicon transistors are making it harder to keep pace with Moore's Law, an observation and prediction by Intel Corp (http://web.eng.fiu.edu/npala/eee6397ex/gordon_moore_1965_article.pdf). (INTC) co-founder Gordon Moore in 1965 (http://web.eng.fiu.edu/npala/eee6397ex/gordon_moore_1965_article.pdf) that the number of transistors and computing power on a semiconductor would double about every two years.

As companies struggle to innovate and keep pace with Moore's Law, sales of silicon-based semiconductors have followed suit.

"If you look at semiconductor end sales in this century, we have only seen a 5% compounded annual growth rate," said Alex Lidow, chief executive and co-founder of privately held Efficient Power Conversion Corp. "It's clearly showing signs of an end market that is very large and very mature and in the same time, the cost for a new facility or new product has skyrocketed."

"Anything under $4 billion market cap is not going to be here tomorrow," said Lidow, who claimed to be part of dozens of acquisitions in his previous role as CEO of International Rectifier, which was purchased by Infineon Technologies AG (IFX.XE) earlier this year.

As the semiconductor business has matured and growth has slowed, it has become too fragmented, with too many companies competing in a variety of segments, while its customers have consolidated into bigger players. In addition, there has been a gradual changing of the guard, with the retirement of many old-school semiconductor industry founders and CEOs over the last several years.

And those trends don't seem to be changing, which should mean these megadeals will continue.

"The consolidation trend is here to stay," said Sumit Sadana, executive vice president and chief strategy officer at SanDisk Corp. (SNDK), which agreed to a $19 billion merger with Western Digital Corp (http://www.marketwatch.com/story/western-digital-to-buy-sandisk-for-19-billion-2015-10-21-71035750).(WDC) that is expected to close late next year. "The number of companies in the industry will shrink by a significant amount. I would say in the next three to four years, 25% to 30% of the companies will have disappeared."

The sector is already approaching those numbers by some accounting. Seven firms in the 30-company Philadelphia Semiconductor Index at the end of 2013 have agreed to be acquired in the past two years.

Of the other independent companies then in the standard-bearer index for the industry, another half-dozen have been mentioned as potential takeover candidates.

"You will see the companies that deliver value be in a stronger position to command that value," said Mark Edelstone, managing director at Morgan Stanley Investment Banking, who looks at the merger mania as having a positive impact on the aging industry. "This has been hard to do because you had too many competitors going after the same sockets, and that has been counterproductive."

Some areas are ripe for consolidation

Some areas ripe for consolidation include the microcontroller and power management area, analog chips, and sensors for the Internet of Things. For example, Dialog Semiconductor PLC plans to buy Atmel Corp. (http://www.marketwatch.com/story/dialog-semiconductor-to-buy-atmel-for-46-billion-2015-09-21)(ATML), which derives about 70% of its revenue from microcontrollers, but last week, Atmel's $4.6 billion bid was trumped (http://www.marketwatch.com/story/atmel-receives-bid-to-challenge-dialog-merger-stock-pops-2015-12-11) by a suitor first reported by Reuters to be Microchip Technology (MCHP).

Other oft-cited potential targets (http://www.marketwatch.com/story/altera-wont-be-the-last-silicon-valley-chip-maker-to-sell-2015-06-02) include Linear Technology Corp.(LLTC) and Maxim Integrated Products Inc. (MXIM), while Analog Devices Inc. (ADI) has been named as both a potential acquirer and a target in the analog market.

While deals should continue, there could be a pause as the industry digests the big deals of 2015. Interest rates ticking upward may also have an effect, as debt becomes a bit more expensive.

"We have been at a pace of about 2 deals a month," Edelstone said. "I think things will slow down from that."

Meanwhile, we will start to see the results of the latest consolidation wave. After a deal closes, products may get shut down or spun out on their own, and valued engineers may lose battles with new team members or even their jobs.

"One side thinks of itself as the buyer; they like to think they are the lead," said Sadana of SanDisk. "In the aftermath, people leave....A company without its top talent becomes not as valuable."

"These are some of the things to guard against," he added, while declining to specifically discuss Sandisk's merger with Western Digital beyond saying the companies are creating integration teams and hope to close in the third quarter of 2016.

Investors likely won't mind the decreased costs, but innovation could suffer.

"It's not a problem now, for the near term, for the stocks it's good," Rasgon noted. "But in the long term, if you are putting off the focus on investing for the future, that is a problem."

Edelstone believes that the big companies will be in more solid shape, with more cash to spend on dealing with the physical limitations semiconductors are starting to hit. But as the industry's ability to continue the previous pace of Moore's Law slows, there may not be much innovation happening, especially because there are only a small number of semiconductor startups working on new technologies.

"We are not refilling the pipeline anymore. The number of startups are few and far between," Edelstone noted, while explaining that starting a chip business requires way too much capital. "It's a lot of risk for VCs to go and fund it, that's why innovation is going to slow as well, because historically, a lot of the innovation has come out of the startups."

Innovation fears are unlikely to completely stop the industry's merger mania, as the chip sector is set to keep shrinking even if it comes at a cost.

"Everyone knows marriage is difficult," Sadana said, "but that doesn't stop people from getting married."

-Therese Poletti; 415-439-6400; [e-mail]



(END) Dow Jones Newswires

December 23, 2015 09:13 ET (14:13 GMT)

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