A semiconductor is a material that has a conductivity level which lies between that of an insulator, such as a ceramic block, and that of a conductor, such as a piece of metal. The MOSFET (metal-oxide-semiconductor field-effect transistor) is the most commonly used semiconductor device and and its silicon variation dominates the semiconductor market space, having over 90% of the market share. Semiconductor chips have a variety of uses in electronic devices. Such is their effectiveness, they are now ubiquitous within mobile and computer-based devices, becoming significant fabrication elements for most electronic circuits. Furthermore, other widespread applications of semiconductors can be found in the automotive and industrial sectors.
Despite the semiconductor market size worldwide growing steadily for the past 5 years, there are still some key issues within the industry. 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 been a hindrance for the industry. The semiconductor industry fears that there will be severe disruptions to the supply chain. China has been increasing the speed of domestic expansion of semiconductor development which could severely affect some of the top US semiconductor companies for whom China is a large market. In addition, other worldwide issues, such as Brexit uncertainty, have produced cross-border regulations which will make it increasingly difficult for small firms to increase their M&A activity, meaning they might miss out on large potential investments needed for growth.
Technological development is the most significant contributing factor to the rise of semiconductors as artificial intelligence and recent complex enhancements, such as 5G, boost their demand. 2020 has reflected these tech advancements as the total value of semiconductor company-related M&A this year has more than doubled compared to 2019. This increase in M&A activity represents consolidation in the industry reflecting recent innovations.
Analog Devices Inc.’s (ADI), a leading signal processing chipmaker, acquisition of Maxim Integrated Products, Inc., a company that produces analogue and mixed-signal circuits, embodies this consolidation. Analog Devices, Inc. and Maxim Integrated Products, Inc. announced on July 13th, 2020, that they have entered into an agreement under which ADI will acquire Maxim in a transaction that values the combined enterprise at over 68 billion USD. The transaction will strengthen ADI with increased breadth and scale across multiple markets and demonstrates the market leaders’ willingness to consolidate their standing.
Nvidia, an American technology company, expressed a similar statement of reinforcement when it announced that it’s going to be acquiring Arm Limited, a British semi-conductor company, in September 2020. Amazingly, Nvidia supports 90% of smartphones worldwide and 97% of AI computing infrastructure use Arm’s chips thanks to their portability and efficiency power. Nvidia’s acquisition of Arm is an example of strategic expertise. Nvidia is planning to build an international AI research facility in Cambridge, housing a state-of-the-art AI supercomputer, powered by Arm chips. In addition, Nvidia gains an incredible position in the market since Arm is partnered with some of its biggest competitors like Intel and Apple – Apple announced this year that it was ditching Intel processors from its new Macs in favour of more efficient Arm technology chips. This means that Nvidia will essentially be profiting from all of its competitors’ products and the acquisition further consolidates its standing as a market leader.
To add to these measures, in October, it was announced that Advanced Micro Devices, Inc. (AMD), an American multinational semiconductor company based in California, would acquire Xilinx, an American technology company that develops highly flexible and adaptive processing platforms, for 35 billion USD. It will result in AMD shareholders owning 76% of Xilinx and while 26% of the company will remain with the Xilinx shareholders. This deal will propel AMD’s new valuation to approximately 110 billion USD. The acquisition aides AMD’s current plan to develop innovative products in order to compete against large competitors, such as Intel. This expansive strategy is indicative of expectations of steady growth over the upcoming years. It is noteworthy that AMD has achieved growth even in the face of the COVID-19 pandemic.
It is likely that the semiconductor sector will face considerable uncertainty going forward. The new pull towards virtual communication will significantly impact the demand for semi-motors due to the drive toward sectors that support connectivity and cloud usage. Profits should increase and it can be expected that there will be even higher levels of M&A activity going into 2021.
By Toby Pallister