Due to the pressure of slowing growth and rising costs, in order to simplify the organizational structure and product lines, the chip industry has stirred up a wave of "mergers and acquisitions" since 2015.

On March 2, according to Reuters, chip maker Microchip Technology Inc. announced that it will acquire Microsemi Corp. in cash at a price of US$68.78 and a total of US$8.35 billion. The company's closing price of 64.3 US dollars on March 1 was a 7% premium.

At present, the transaction is waiting for the agreement of the shareholders of Microsemi, which is expected to be completed in the second quarter of this year. As the financial advisor of Microcore Technology, JP Morgan Chase will provide US$5.6 billion acquisition financing for Microcore Technology.

According to public information, Mecorsein is a company headquartered in Aliso Viejo, Calif., which provides high-performance analog and mixed-signal integrated circuits and semiconductors for aerospace, defense, communications, data centers, and industrial applications.

Microchip manufactures various kinds of chips. According to Gartner's data, Microchip's global single-chip microcomputer ranks first in terms of shipments. There are 45 sales offices, 3 factories and 4,500 employees worldwide. This transaction will enhance the strength of Microchip in the fields of computers and communications.

However, this is only the latest case of the chip industry reorganization, and the chip industry mergers and acquisitions have continued for a long time.

Data from Dealogic, a financial data provider, shows that in 2014, there were 369 cases of global chip industry mergers and acquisitions, and the M&A transaction volume was 37.7 billion U.S. dollars.

By 2015, this figure has continued to rise. According to a report released by the International Semiconductor Industry Association, in 2015, the global chip industry’s M&A transaction volume exceeded US$60 billion, which was expected to be US$116 billion and US$93 billion in 2016 and 2017 respectively.

And Broadcom's offer to Qualcomm was also raised in 2017. Qualcomm asked Broadcom to raise the tender offer price to US$160 billion and cover Qualcomm’s US$25 billion in debt. Once the transaction is successful, it will become the largest merger and acquisition in the history of the semiconductor industry.

Although the Chinese chip industry has made some progress in recent years, Chinese companies are also facing tremendous pressure under the global wave of chip industry consolidation.

Global Chip Industry M&A March

Dealogic data shows that the number of chip company mergers and acquisitions since 2015 was 276, compared with 369 in 2014. The number of chip company mergers and acquisitions showed a declining trend, but the transaction volume of individual mergers and acquisitions was even larger.

All-weather technology statistics found that in 2015, the largest M&A deal in the global chip industry was Avago Technologies’ $37 billion acquisition of Broadcom. Of the total transaction amount, the cash amounted to 17 billion U.S. dollars and the stock value was about 20 billion U.S. dollars. After the merger, the new company's corporate value will reach 77 billion US dollars.

In July 2016, Softbank acquired ARM for 23.4 billion pounds (about 31 billion U.S. dollars), becoming the second largest acquisition in semiconductor history (as of that time).

Just three months later, this record was broken by Qualcomm. In October 2016, Qualcomm announced the acquisition of NXP for US$47 billion to expand the range of chips and expand its business scope, setting a record for the largest M&A transaction in the chip industry.

In 2017, the scale of individual mergers and acquisitions continued to rise. In November last year, Broadcom proposed to acquire Qualcomm, a competitor, for $103 billion, at a price of $70 per share, including $60 in cash and $10 in Broadcom shares.

Subsequently, Qualcomm rejected Broadcom’s acquisition, saying that the quotation was too low and “seriously underestimated” the value of Qualcomm. Some Qualcomm investors stated that Broadcom needed to raise the purchase price to at least $80 per share. This led to the tug of war between the two sides.

Recently, the British "Financial Times" said that Qualcomm has given up its intention to oppose Broadcom's acquisition and is willing to reach an agreement on the chip business. Qualcomm also asked Broadcom to raise its bid to 160 billion U.S. dollars and cover Qualcomm’s $25 billion in debt. Once the transaction is successful, this will become the largest merger and acquisition in the history of semiconductors. The new company will also become a super “giant”, change the existing pattern of the entire chip industry, make Broadcom become the third industry, second only to Intel and Samsung Electronics, in the wireless The communications chip field will be in an absolute monopoly.

Why did you get "merger tide"?

For a long time, under the pressure of slowing growth and rising costs, chip manufacturers have acquired new technologies on the one hand and acquired manufacturing, sales and development costs on the other.

In 2015, Gartner predicted that the global semiconductor industry revenue will decline 0.8% this year, which is the first decline since 2012. The 2016 data shows that the semiconductor industry’s revenue was US$339.7 billion, a 1.5% decrease from 2015, and the top 25 semiconductor manufacturers’ total revenue increased by nearly 7.9%. The low growth or even falling environment of the chip industry did not start to improve until 2017.

However, many chip companies have high capital output but cannot obtain high returns. Take Samsung as an example. About two-thirds of its capital expenditures in 2017 were spent on semiconductors, and nearly one-third were spent on displays. According to S&P Global Market Intelligence, Samsung’s investment in new facilities or existing facilities for the production of semiconductors, displays, and other products has nearly doubled. As a result, its 2017 capital expenditure exceeds PetroChina’s (US$29 billion). And China Mobile (27 billion U.S. dollars), successfully top 2017 Capital expenditure Top10 list.

Samsung’s profit growth appeared “weak”. According to Samsung’s fourth-quarter earnings report for 2017, its operating profit was 15.1 trillion won (approximately 92.1 billion yuan), which is lower than the average expected by analysts surveyed by Reuters (97 billion yuan).

In November 2017, Morgan Stanley also pointed out in its research report that the chip industry has already reached its peak due to the decline in the price of flash memory chips.

After the chip company is aware of this trend, it uses mergers and acquisitions to reduce costs. Avago Technologies expects that after the successful acquisition of Broadcom, it will save 750 million U.S. dollars annually from 2017 onwards.

There are even industry experts who say that the reduction in the number of chip makers is expected to ease the price competition, and industry survivors can also integrate complementary product lines. This situation can reduce sales channel investment, and manufacturers can also sell a large number of chip products that can work together better.

On the other hand, for the acquirer, to a large extent, it can help it expand its business scope, acquire new technologies, and even beat competitors to some extent. For example, through the acquisition of Cosemi, Broadcom can find a gap to further open the domestic chip market. At the same time, the photodetector chip can also allow Broadcom to further strengthen its optical fiber communications business. Intel's acquisition of Altera has acquired the latter's FPGA technology, which can block ARM in the data center.

The International Semiconductor Industry Association also expects that in the next decade, the semiconductor industry will likely move from horizontal integration to vertical integration. Integration from horizontal to vertical, chip manufacturers increasingly strong overall strength, industry concentration is increasingly high, the oligopoly may be further strengthened the pattern.

Chinese core or counterattack

The global wave of mergers and acquisitions also has a profound impact on the development of the Chinese chip industry.

From the perspective of smartphones, IDC data shows that Huawei, OPPO, and Xiaomi all rushed into the top five smartphone sales in 2017. However, in addition to Huawei, the chip supply chains of other OEMs are highly dependent on foreign companies such as Qualcomm.

In January of this year, Qualcomm also announced signing with Lenovo, OPPO Guangdong, Vivo and Mi Communications Technologies respectively. In the MoU, four companies expressed their intention to purchase high-end radio frequency front-end components worth not less than US$2 billion in total to Qualcomm within three years.

In the future, once the supply chain companies emerge unexpectedly (for example, mergers and acquisitions, product price increases), several major mobile phone manufacturers in China will be affected. Even if Chinese companies can submit some conditions conducive to the development of domestic industries through M&A review, it is still difficult to stop the M&A behavior itself.

In recent years, with the dual support of policies and funds, the development of Chinese chip companies has achieved certain results.

In June 2014, the State Council issued the "Outline for Promoting the Development of the National Integrated Circuit Industry", which set a strategic goal for realizing the leap-forward development of China's chip industry in a relatively short period of time.

Only two months later, 15 companies including China State Finance, China Tobacco, and China Mobile have jointly established a national fund (hereinafter referred to as “the big fund”) for design, packaging, and testing in the chip industry chain. Wafer manufacturing and other key links provide financial support.

The initial plan of the fund is 120 billion yuan, and the actual fund-raising is close to 140 billion yuan. At the same time, the total scale of integrated circuit development funds established by local governments at all levels exceeds 300 billion yuan. Less than a year after its establishment, the “large fund” invested 40 billion yuan in 25 projects, including a group of leading companies in the domestic chip field, such as Ziguang, SMIC, ZTE, and Changjiang Electronics. As of the end of 2017, the national integrated circuit industry investment fund has invested more than 70 billion yuan, of which about 60% of the funds are invested in semiconductor manufacturing.

According to the statistics of the China Semiconductor Industry Association, sales of China's integrated circuit industry reached 433.55 billion yuan in 2016, a year-on-year increase of 20.1%. Among them, the high-end chip design industry in the industry chain continued to maintain rapid growth, with sales of 164.43 billion yuan, a year-on-year increase of 24.1%.

ICinsights report shows that among the top 50 pure chip design companies in the world, there was only one Chinese company in 2009—Hai Si, which is owned by Huawei. In 2016, China’s number of companies entering the list increased to 11 including Hass, Spreadtrum, ZTE, Datang, NARI, Wah Dae, RDA, ISSI, Rockchip, and Allwinner. , pick up technology (Montage).

In 2017, China’s chip industry also achieved some brilliant results: Huawei Hass released the world’s first 10-nanometer AI chip; supercomputers equipped with domestic chips “Shenwei Taihu Light” won the world’s super-computing field. In three consecutive years, Ziguang and Hass rank among the top ten chip design companies in the world. Among the top 50 global chip design companies, Chinese enterprises have occupied 11 seats; Huawei has also successfully used a large number of Hass Kirin chips in high-end models. No longer subject to people.

Compared with international advanced chip technology, China's chip industry still has a certain level of development. With the advent of the 5G era, it will be difficult for China's chip industry to completely get rid of foreign companies’ reliance in 2020.

In an article on March 1st of the People's Daily, it was stated that "China Core" wanted to face a real counter-attack, and it still faced many challenges. One was the technological gap, and the other was the weak level of production. However, the article believes that 2018 will become a key year for the development of China's 5G chips. It is believed that with strong policy support and the unremitting efforts of domestic manufacturers, China's 5G will surely lead the world in the near future.

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