Pace of electronics supply base consolidation slows

James Carbone, contributing editor

Mergers and acquisitions among electronics suppliers will continue, but many of the deals will be small and involve connector companies, by James Carbone.

The bad news for electronics purchasers is that the consolidation in the electronics supply base that has occurred over the last two years will continue. The good news is that there will be less merger and acquisition activity.

While consolidation in the electronics supply chain is not a new phenomenon, it has been especially aggressive particularly in the semiconductor industry, which saw a record amount of mergers and acquisitions over the last two years.

Mergers and acquisitions announced in the chip industry in 2015 totaled $107.3 billion. In 2016 about $99.6 billion of consolidations occurred, according to researcher IC Insights. Rob Lineback, senior research analyst for the company, said 2015 “was the all-time high for mergers and acquisitions in the semiconductor industry and 2016 was the second all-time high. This is totally historic. The last big wave probably would’ve been during the dotcom era in the late 1990s,” said Lineback.

M&A activity has also occurred with passives and connector manufacturers as well as with distributors and electronics manufacturing services (EMS) providers.

Sometimes consolidation can result in a stronger supply base because a struggling electronics manufacturer may be purchased by a larger, financially healthier company that continues to manufacture the acquired supplier’s products.

However, many purchasers lament mergers and acquisitions because it can mean fewer sources of supply and result in less purchasing leverage with semiconductor and other component manufacturers. The good news for those buyers is that in the first half of 2017, it appears that M&A activity in the semiconductor industry will be nowhere near the level it was over the last years.

No M&A surge expected
IC Insights says in the first six months of 2017 there were only $1.4 billion of mergers and acquisitions announced, including MaxLinear’s $687 million cash acquisition of analog and mixed-signal IC supplier Exar.

“We don’t expect to see a major surge this year to the point where acquisitions will be at the level that there were over the last two years,” said Lineback. However, he cautioned that there were few acquisitions announced in the first half of 2016, too, and it appeared there might be a slowdown in M&A activity for the year. “But then we had big ones hit in the second half of the year. In fact, 95 per cent of the acquisitions last year were announced in the second half,” he said.

Those major mergers and acquisitions included SoftBank buying ARM for $32 billion; QUALCOMM purchasing and NXP for $47 billion, Analog Devices acquiring Linear Technology for $14.8 billion.

More consolidation is likely for the industry in the second half of this year, but it is unlikely there will be major consolidations like the ones in 2015 and 2016 with one possible exception.

“Everyone is waiting for Toshiba to announce the agreement to sell its flash memory business,” said Lineback. “That is a big one and will be at least $18 billion,” said Lineback. Toshiba announced in June that a group consisting of Bain Capital, SK Hynix and Japanese-government backed banks was its preferred bidder. Western Digital is also bidding and has filed suit in San Francisco County Superior Court arguing that a previous joint venture it had with Toshiba means Toshiba needs its consent to sell the flash business. It is not known when Toshiba will be allowed to sell its flash business.

Imagination Technologies is another company that may be sold. The company licenses intellectual property for graphics processors used in smart phones including Apple’s iPhone. However, Apple announced it would stop using Imagination’s IP in two years. Apple accounts for half of Imagination’s revenue and because of Apple’s announcement, Imagination put itself up for sale.

“Imagination has processor cores and technology that could be of interest to a large semiconductor company or a company like SoftBank,” said Lineback. Other companies such as Qualcomm and MediaTech may also be interested in Imagination.

One reason why a slowdown in consolidation in the semiconductor industry may occur this year is companies that made big acquisitions last year are “off the table in terms of consolidation because they need time to digest what they’ve already purchased,” said Lineback.

“In addition, we’ve seen a tremendous amount of government scrutiny of foreign acquisitions, especially with the Chinese and that in part could be putting the brakes” on some consolidation. He noted that both the European Union and the U.S. government have review committees concerning mergers and acquisitions.

Misplaced concern?
While buyers are always concerned about supply base consolidation, Lineback noted that mergers and acquisitions don’t necessarily mean there will be fewer sources of supply for parts.

Sometimes a company will buy another component manufacturer to acquire the products and technologies  the acquiring company currently doesn’t have. Such was the case with Intel purchasing Altera which makes field programmable gate arrays (FPGA). “Some companies want to branch areas and are not buying their competitors,” said Lineback.

In some cases, semiconductor companies sell off business units over regulatory concerns because governments don’t want monopolies, said Lineback. “For instance, NXP had to sell off some of its businesses to buy Freescale. It sold its power and RF product business. Freescale had a strong power and RF transistor business,” said Lineback. NXP sold its power products to Chinese investors that created a new company, said Lineback.

“Consolidating forever”
As with semiconductors, consolidation is a continuing trend in the connector industry. “The connector industry has been consolidating forever,” said Ron Bishop, president of connector research firm Bishop & Associates. “Since 1980, we’ve recorded over 300 acquisitions,” he said. There are years where there may be 25 acquisitions and then the following year there may be less than 10, according to Bishop.

For instance, in 2014 there were 26 mergers and acquisitions in the connector industry. In 2015, the number dropped to 9 and then increased to 19 in 2016, said Bishop.

“A lot of the big mergers and acquisitions are probably over within the industry,” said Bishop. “But there are a ton of smaller acquisitions. Larger and midsize companies are looking to acquire technology and they’re also adding high-tech cable assembly capabilities to their portfolios,” he said.

A lot of consolidation in the connector industry involves startups. “We keep getting new connector companies popping up in China and in various parts of the world,” said Bishop. “One startup gets acquired and another one pops up. You can start a connector company without a lot of capital,” he notes.

A new connector manufacturer may launch a business, develop a small, focused portfolio and serve a niche. The company may operate for 10 years, make a name for itself, and a larger company will “come in and make the startup an offer it can’t refuse. It happens a lot,” said Bishop.

He said there are many startups in Asia and “there is going to be an ongoing round of acquisitions for the foreseeable future.”

Despite consolidation there are still more than 1,000 connector companies worldwide, according to Bishop.

He added that large connector companies such as Amphenol, Molex, and TE are trying to diversify their businesses to improve productivity. As a result, “they are going out to buy peripheral types of companies” such as sensor or test equipment manufacturers, said Bishop. The large connector manufacturers are looking to buy companies that “fit with their technology and their manufacturing knowledge. They are looking for companies with products that are related to the interconnect world, but are not interconnects themselves,” he said.

He said connector industry consolidation often occurs when business is down and small or medium-size companies are looking for a larger partner. “When business is bad sometimes the bigger companies have a better opportunity to acquire than when things are going good,” said Bishop.

“Cheap financing” available
Consolidation can occur in electronics distribution when business is good or bad and can depend on the availability of financing.

Robin Gray, chief operating officer and general counsel for the Electronic Components Industry Association (ECIA) said mergers and acquisitions have “picked up over the last year or two.”

‘Mergers and acquisitions have picked up over the last year or two and many involve regional and smaller niche distributors being acquired by the bigger guys,” said Robin Gray, chief operating officer and general counsel for the Electronic Components Industry Association (ECIA)

“I think it is because of cheap financing,” he said. There is an expectation that the days of inexpensive borrowing is going to be ending so companies are looking for acquisition opportunities that they can do now. “Even if the timing isn’t right, the money is certainly right,” said Gray.
Most acquisitions in distribution involve large distributors purchasing smaller distributors that may have an interesting niche.

“Other than Avnet’s acquisition of Premier Farnell, it’s mostly regional and smaller niche distributors being acquired by the bigger guys as well as some mid-size guys buying some niche distributors,” said Gray.

In some cases, a distributor wants to expand its product reach. A passives distributor may decide to carry some semiconductors to reach new customers and to sell more products to existing ones.

For instance, passives and connector specialist distributor TTI in July announced it had acquired Symmetry Electronics, a semiconductor distributor. Symmetry carries integrated circuits for wireless, cellular, Bluetooth and video applications.

Mergers and acquisitions are occurring in the EMS industry, too. Some EMS providers may acquire a small contract manufacturer in a geography that the larger EMS company does not currently manufacture. In other cases, a provider may buy another company that serves a particular customer segments such as aerospace or automotive.

More services needed
Some M&A activity in the electronics outsourcing industry involves EMS providers buying companies that help the manufacturer offer more value-added services to OEM customers, according to researcher Gartner Inc.

Sam New, principal research analyst for Gartner, said OEM customers are expecting more end-to-end solutions from their EMS suppliers and not just core manufacturing and testing capabilities.

Many OEMs are looking to develop very strategic relationships with EMS providers that can offer everything from design services to direct shipment to customers, according to Virginia Howard, research director at Gartner.

“Having these very deep, complex partnerships is very important to businesses,” she said. It means that EMS providers need to add certain capabilities to meet the needs of OEM customers.

Many OEMs are using fewer EMS providers than in the past, relying on just two or three contract manufacturers rather than a dozen or more. As a result, some EMS providers are purchasing companies to help them fill out their suite of services that they can offer OEM customers according to Gartner.

In some cases, EMS providers are purchasing design services companies to help support OEMs. Others may need help managing supply chain risk or component obsolescence and may require a niche software, to help develop solutions to those supply chain challenges.