Western Digital unveiled a $19 billion cash and stock takeover of SanDisk…

Semiconductor maker Lam Research is acquiring KLA-Tencor for $10.6 billion.

Avago Technologies agreed to pay $37 billion for Broadcom.

Intel scooped up chipmaker Altera for $17 billion.  And back in March, NXP Semiconductor offered to buy Freescale Semiconductor for $11.8 billion.

All of which puts the struggling semiconductor sector right back in the spotlight.

More than 28% off five-year highs, the semiconductor sector was struggling with softening demand and reduced M&A activity.

Where M&A Activity is Booming

But that’s quickly changing.

Now, more than 18% off the lows, the semiconductor sector is being bid higher in spectacular fashion on the heels of incessant M&A activity.

The sector has seen just over $104.7 billion in M&A activity so far this year – as compared to the $37.7 billion for all of 2014.

And rest assured – as smart investors wake to the potential – there are more to come.

The Temperature of the Tech Economy

Semiconductors are the barometers of the global tech sector, if you will.

They’re integral to just about everything we use. Smartphones, media players, computers, printers, copiers, Internet access, cars, and eventually the Internet of Things.

To hear that worldwide chips sales totaled $84 billion for the second quarter – a 2% increase year over year… and a 1% increase over the previous quarter, according to the Semiconductor Industry Association, is comforting.

To hear that Texas Instruments soared 12% the other day, as the chipmaker raised its fourth quarter outlook was even better.  The company expects to post EPS of between 64 and 74 cents with revenue ranging from between $3.07 billion to $3.33 billion thanks to an uptick in demand for semiconductors used in industrial machinery.

Demand for its chips in wireless phones is expected to increase, as well, offsetting global economic concerns out of China.

Analysts were only looking for a forecast of 62 cents on revenue of $3.12 billion.

Intel – the sector’s 800-pound gorilla – posted solid growth, too.

However, despite the good news, and even though 2015 sales are on pace to beat 2014 numbers, we must consider that macro headwinds and softer demand are expected to slow growth in semiconductors.

Gartner has predicted that global semiconductor revenue could decline 0.8% this year to just $337.8 billion.

This would be its first drop since 2012.

But it’s that slowdown that will drive bigger players – like Intel – to embrace further M&A.

Mergers are reducing overhead and competition, alleviating pricing concerns and boosting revenue along the way.  Mergers of this magnitude are cutting expenses, and the need for further capital investment.

Western Digital’s acquisition of SanDisk gives it an opportunity to cut $500 million in costs and gain exposure to flash memory.

Intel’s acquisition of Altera gives it a leg up in Internet of Things offerings – a technological revolution that will connect seven billion people around the world to an estimated 50 to 70 billion machines.

Altera’s field programmable gate array (FPGA) technology will give Intel dominance in enhancing server speeds by -- some estimates -- at a factor of 10.  With the PC market slowing and mobile running in place, this will expose Intel to a new market, and revenue stream.

It’s exciting… and only highlights future possibilities in semiconductor M&A.

The numbers of mergers we’ve already seen are incredible, outpacing what we’ve seen over the last 20 years.  And it’s far from over… opening the door for smart investors to scoop up cheap companies that are likely to be acquired along the way.

Leave a Reply

Your email address will not be published. Required fields are marked *

Post comment