Chip Consolidation Nearly Over, Analyst Says

　　After about three years and hundreds of billions of dollars in mergers and acquisitions, the consolidation of the global semiconductor industry is pretty much finished, according to Bill Wiseman, a senior partner with management consultancy McKinsey.

　　“The issue is that there aren’t a whole lot of deals left,” said Wiseman, who prior to joining McKinsey in 2001 was designing mixed-signal integrated circuits for IBM and before that was a U.S. Navy Seal. “There aren’t that many deals left because there aren’t that many attractive targets out there.”

　　Most of the consolidation has been based on cost and synergy, Wiseman said at the grand opening keynote session of Semicon Taiwan this week. The industry has been in a slow-growth rut for quite a long time, he added.

　　Those doldrums may be past as the outlook is for overall industry revenue to soar to $400 billion this year from $339.7 billion in 2016, and consolidation starts to pay off, Wiseman said. For the first time in years, semiconductor prices are increasing, and that doesn’t just mean memory chips, he said.

　　“Because of consolidation, we’re seeing rising prices for mature products,” according to Wiseman.

　　One measure of the health of the industry is the R&D cost-to-revenue ratio, which even after the recent buying spree remains very stable at around 14 to 15 percent. If it gets to 17 percent, chip suppliers need to raise prices, "and this is an industry that doesn’t like that — unless you’re a memory provider," Wiseman quipped.

　　Other factors also augur an end to the acquisition binge.

　　There have been a lot of regulatory approval holdups, especially for those coming out of China, he said just a day before U.S. President Donald Trump blocked the acquisition of Lattice Semiconductor by an investment fund backed by the Chinese government.

　　Prior to leaving office in January, former U.S. President Barack Obama released a report warning that China's ambitious push to expand its domestic chip production could threaten the U.S. semiconductor industry. Based on McKinsey’s prediction, any further attempts by China’s Tsinghua Group or other government-funded entities to buy U.S. chipmakers are likely to be thwarted. If that happens, China’s aim to become a major player in the global chip industry may also hit a speed bump.

　　Now may be a time for the acquirers in the chip industry to sit back and digest the companies they’ve gobbled up.

　　“Most of the companies that felt confident to make acquisitions are busy integrating the companies they bought,” said Wiseman, who has advised chipmakers around the globe on business strategy.

　　Deals Still on the Table

　　Some deals still on the table may spell the end for the industry M&A activity, based on the McKinsey outlook.

　　Toshiba’s lucrative NAND flash memory business remains a hotly pursued quarry for several groups led by Bain Capital, Western Digital and Foxconn. Apple continues to be an active player in the bidding, according to Bloomberg.

　　Apple depends on flash memory from Toshiba in its iPhones and iPods, and wants a secure supply to limit its dependence on rival Samsung Electronics, which also supplies OLED screens for the latest iPhones and is Apple’s main rival in the smartphone business.

　　The number of memory suppliers has collapsed from 32 DRAM companies decades ago to just three today: Samsung, SK Hynix and Micron. On the NAND side, there are four major IP holders: a joint venture between Micron and Intel; another alliance between Toshiba and Western Digital; Samsung; and SK Hynix.

　　There’s also Qualcomm’s plan to acquire NXP for a price of $110 a share, or a total of $38 billion in cash. The largest maker of mobile phone chips has extended its tender offer for NXP to Sept. 22, the eighth postponement since the deal was announced in November.

　　European regulators have raised questions on the deal, while NXP shareholders such as Elliot Management have been saying the Qualcomm offer for NXP isn’t attractive enough. Qualcomm Chairman Paul Jacobs said he believes the offer is a fair price.

　　Mark your calendars. September may be the month when the dust settles on the M&A activity and the big players remaining in the chip industry can look forward to strong sales and better profitability. Not everyone in the electronics ecosystem may be happy about that.