Recharged M&A Activity in the Semiconductor Industry

By Gurneek Gill (UCL), Mustafa Bayramli (Wharton), Amarins Laanstra-Corn, Roshni Padhi (Stanford)


I. Background

Semiconductors are materials that have an electrical conductivity value that lies between that of an insulator, such as a ceramic block, and a conductor, like a piece of metal. The most commonly used semiconductor device is called the MOSFET (metal-oxide-semiconductor field-effect transistor) and its silicon variation dominates the semiconductor marketspace by having over 90% of the market share. Semiconductor chips can be employed in a variety of uses in electronic devices. Such is their effectiveness; they can now be found in every mobile and computer-based device as they have become significant fabrication elements for most electronic circuits. Furthermore, other widespread applications of semiconductors can be found in the automotive and industrial sectors.

Ever since the 1960s, the scalability and growth of this industry have been largely driven by companies that have developed extraordinary capabilities from semiconductor chips. The progress can be clearly seen -- in the 1950s, single transistors could be found on semiconductor memory chips, whereas today, there are billions of transistors per chip on microprocessors and memory devices. Memory chips are largely what have consistently driven the growth of the semiconductor industry due to their applicability in central processing units (CPUs) of computers/laptops, which are ever-increasing in popularity. Though Intel largely dominates the semiconductor market for computer applications, Qualcomm pioneers the way in the smartphone system-on-a-chip market, another rapidly growing marketplace given the huge recent prominence of iPhone and Android mobile devices which are seeing many complex enhancements such as 5G. Thus, it is clear to see that the technological revolution that has been occurring in the past 5 years has been a huge contributing factor to the rise of semiconductors; as artificial intelligence begins to take shape, this is only likely to continue. 2020 has reflected this since the total value of semiconductor company-related M&A this year has more than doubled compared to 2019.

Though the semiconductor market size worldwide has been steadily growing for the past 5 years (sales have increased by over 25%), there are some key issues to consider. The global semiconductor industry revenue growth rate for 2019 was in fact -12% YoY, and there are clear reasons for the volatility in the semiconductor industry’s growth. Much of this has been down to macroeconomic factors that have caused market uncertainty. For example, the ongoing trade war between the US and China has not helped proceedings. The semiconductor industry fears that there will be severe disruptions to the supply chain. China has been quickening domestic expansion of semiconductor development which would severely affect some of the top US semiconductor companies that push a lot of their trade there. Also, other worldwide issues such as Brexit uncertainty have produced cross-border regulations which will continue to make it increasingly difficult for small firms to increase their M&A activity, meaning they are missing out on huge potential investments that they need to progress.

From 2015-2019, the top 5 companies in the semiconductor industry have continued to dominate, based on average yearly profit. These companies are Samsung, Intel, TSMC, Qualcomm, and Apple. In a study done by McKinsey & Co., based on 254 semiconductor companies in the S&P 500, it was found that the top 5 companies in this industry had a combined average yearly profit that was $6.8 billion higher than the other 249 companies combined. This is largely due to larger companies having ample working capital to invest in the more challenging cutting-edge research and development required as chips become even more miniature. Furthermore, the top companies are much better placed to deal with critical supply chain issues such as intellectual property (IP) protection; consequently, this yields market dominance for these well-established companies.

II. Analog - Maxim

Analog Devices, Inc. is a leading analog, mixed-signal, and digital signal processing chipmaker. The firm has a significant market share lead in converter chips, which are used to translate analog signals to digital and vice versa. The company serves tens of thousands of customers, and more than half of its chip sales are made to industrial and automotive end markets. Analog Devices' chips are also incorporated into wireless infrastructure equipment. The company serves clients in industrial, automotive, consumer, and communications markets through a direct sales force, third-party distributors, and independent sales representatives in the United States, the rest of North and South America, Europe, Japan, China, and the rest of Asia, as well as through its Website. It has a strategic collaboration with Pinpoint Science Inc. to advance the development and manufacture of novel nanosensor diagnostics. Maxim Integrated Products, Inc. designs, develops, manufactures, and markets a range of linear and mixed-signal integrated circuits in the United States, China, rest of Asia, Europe, and internationally. The company also provides various high-frequency process technologies and capabilities used in custom designs. It serves automotive, communications and data center, consumer, and industrial markets.

Analog Devices, Inc. and Maxim Integrated Products, Inc. announced on July 13, 2020, that they have entered into a definitive agreement under which ADI will acquire Maxim in an all-stock transaction that values the combined enterprise at over $68 billion. The transaction, which was unanimously approved by the Boards of Directors of both companies, will strengthen ADI as an analog semiconductor leader with increased breadth and scale across multiple attractive end markets.

Under the terms of the agreement, Maxim stockholders will receive 0.630 of a share of ADI common stock for each share of Maxim common stock they hold at the closing of the transaction. Upon closing, current ADI stockholders will own approximately 69 percent of the combined company, while Maxim stockholders will own approximately 31 percent. The transaction is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes.

“Today’s exciting announcement with Maxim is the next step in ADI’s vision to bridge the physical and digital worlds. ADI and Maxim share a passion for solving our customers’ most complex problems, and with the increased breadth and depth of our combined technology and talent, we will be able to develop more complete, cutting-edge solutions,” said Vincent Roche, President and CEO of ADI. “Maxim is a respected signal processing and power management franchise with a proven technology portfolio and impressive history of empowering design innovation. Together, we are well-positioned to deliver the next wave of semiconductor growth, while engineering a healthier, safer and more sustainable future for all.”

As was the case for many of these prior deals, ADI argues that the Maxim deal -- expected to close in the summer of 2021, provided regulators sign off -- will yield significant cost synergies and give the company more comprehensive product lines to sell to customers in major end-markets such as automotive, industrial, telecom infrastructure and consumer electronics. The company asserts the deal will generate $275 million worth of c