Semiconductor M&A Heats Up

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Last year was a tough one for M&A in the semiconductor industry. According to Dealogic, deal volume plunged from $11.2 billion to $3.2 billion. There were also some deals that came undone, such as Broadcom's (BRCM) attempted takeover of Emulex (ELX).

But lately, there has been an increase in activity. This week, Microchip Technology (MCHP) agreed to pay $275 million or $2.85 per share for Silicon Storage Technology (SSTI). Silicon Storage had earlier agreed to a private equity buyout at $2.10 per share, but the deal never went through.While the deal seems small, it is still important. If anything, it shows that buyers and sellers are warming up to deal-making -- and also provides an indication of the kinds of transactions we may see.

Anatomy of the Deal

There's no question that Silicon Storage is a good company. The primary focus is developing NOR flash memory semiconductors for digital consumers, networking and wireless markets. Some of Silicon Storage's customers include Apple (AAPL), Dell (DELL), IBM (IBM) and Sanyo.

The company's technologies requires substantial amounts of R&D. As a result, there is also an extensive patent portfolio, with 360 patents granted.

But Silicon Storage faced major challenges. Price deflation has been brutal and it is difficult to compete against global operators. What's more, product life-cycles are short and product obsolescence is rampant.

In light of all this, why would Microchip Tech want to own Silicon Storage? There are several reasons. First, the company helps to round out Microchip Tech's portfolio. Next, the deal is downright cheap. In the most recent quarter, Silicon Storage generated revenues of $71.3 million and net income was $3.1 million. The company also has $180 million in cash and securities, without any long-term debt. This means that the effective valuation is only $95 million.

Finally, Microchip believes that the fortunes are improving in the semiconductor business. So why not try to pick up growth and cutting-edge technology at a cheap price?

What to Expect?

Interestingly enough, Microchip Tech-Silicon Storage deal may be a template for more deals. There are a variety of larger operators, like Intel (INTC), Broadcom, Analog Devices (ADI) and Texas Instruments (TXN), who have powerful balance sheets and need to find ways to add capabilities or enter higher-growth niches.

There has already been a stirring. Some of the recent deals include Broadcom's $178 million purchase of Dune Networks, ON Semiconductor's (ONNN) $63 million deal for California Micro Devices and Applied Materials's (AMAT) $364 million acquisition of Semitool.

OK, so what might be the targets? There are many to choose from. However, the attractive categories are likely to be in areas like home automation, WiFi and cellular. And, as for the companies, possible targets include Ceva (CEVA), Monolithic Power Systems (MPWR), Intersil Corp. (ISIL) National Semiconductor (NSM) and Supertex (SUPX).

In other words, the conditions appear just right for semiconductor deals to rev up again in 2010.

Tom Taulli advises on
business tax preparation and resolving tax problems. He is also the author of a variety of books, including the including The Complete M&A Handbook. His website is at Taulli.com.
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