China’s interest in foreign chipmakers leading to more competitive M&As

Photo: REUTERS/Ralph Orlowski

China’s unabashed interest in foreign chipmakers in an already record year of deals has been quickly read by rivals as a sign that mergers and acquisitions (M&As) will get more competitive and target companies will get more expensive.

Chipmakers have announced over $80 billion worth of M&As in 2015. Chipmakers are acquiring peers to expand capacity and capabilities ahead of an explosion in demand for all kinds of semiconductors necessitated by the Internet of Things.

“The days of growing organically through technological advantage are over,” said Hidetoshi Shibata, chief financial officer of Japan’s Renesas Electronics Corp. “Scale and having a wide variety of solutions have become crucial.”

But a Chinese buying spree could push the value of merger targets beyond rivals’ reach. Tsinghua Unigroup Ltd is leading China’s development of a national semiconductor industry with $10 billion spent on M&As over the past two years and plans for almost $50 billion more over the next five.

“Chinese companies do pay quite a lot,” Shibata said in an interview. “The concerns are that they jack up M&A valuations and that they become huge rivals.”

Many Chinese deals are by privately held parties, such as Tsinghua, which this month earmarked almost $13 billion for a memory chip factory. In April, a group of Chinese investors agreed to buy U.S. smartphone camera chip maker OmniVision Technologies Inc for about $1.9 billion in cash.

“It’s not over,” Handel Jones, chief executive of chips consultancy International Business Strategies, said of overall chip sector M&As. “We know of a number of additional activities going on; some will be announced in the next couple of weeks.”

Jones said he expects consolidation among companies making chips for memory and power management.

NO PANIC

Chipmakers’ strategies have diverged since the 2011 peak of the industry’s mainstay market of personal computers (PCs). Some have bet on energy-efficient chips for smartphones, fail-safe chips for vehicles, hefty server chips powering databases, or chips for myriad household goods under the Internet of Things.

“There are simply too many potential variables in play for any participant to feel secure, and both industries (chips and PCs) have a history of creating big winners and big losers based on correctly anticipating the technology path,” said Bob Merritt, an independent consultant to thechip industry.

The result is firms merging to pool skills and technology, with early movers prodding those fearful of being left behind. Microsemi Corp of the United States became the latest dealmaker on Tuesday with a $2.5 billion offer for compatriot PMC-Sierra Inc.

“There is no panic but there certainly is a sense of urgency,” said Pallavi Madakasira of Lux Research.

CONFUSION

China’s role has been as much to confuse as galvanise. Some deals, such as Tsinghua’s 15 percent purchase of Western Digital Corp, involve low-margin, commodity-type hard disk drives and memory chips with seemingly limited growth prospects.

“Some of the activity I don’t quite understand,” Mark Liu, president and co-chief executive officer at Taiwan Semiconductor Manufacturing Co Ltd, said in an interview.

Analysts attribute much of the activity to Chinese aspirations as an emerging superpower to become self-sufficient in stand-out industries, by controlling all aspects of a business and developing products to rival established players.

With the industry already in flux, China’s ambition makes it increasingly difficult to predict how the landscape will change.

“As people sort of rationalise these acquired businesses and cut back on development, where is your growth coming from in three to five years?” said analyst Gus Richard at Northland Securities.

“It’s hard to start making predictions because people are doing things outside of what I would think would be normal behaviour.”

(Reporting by Miyoung Kim in TAIPEI and Makiko Yamazaki in TOKYO; Additional reporting by JR Wu in TAIPEI, Reiji Murai and Ritsuko Ando in TOKYO, Jeremy Wagstaff in SINGAPORE, Paul Carsten in BEIJING, Yimou Lee in HONG KONG and Abhirup Roy in BENGALURU; Editing by Christopher Cushing)

Also Read:

China’s Tsinghua Unigroup plans $47b investment to become world’s top 3 chipmakers in next 5 years

China’s Tsinghua Unigroup buying 25% in Taiwan chip firm Powertech in $600m deal

Reuters

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.