ON Buys Fairchild: Don’t Expect Too Much Ripple Effect
In the latest of what has been a nearly unprecedented series of mergers and acquisitions in the semiconductor industry this year, ON Semiconductor Corp. is buying Fairchild Semiconductor for $2.4 billion. The combined company will have annual revenue of $5 billion, making it the No.2 player in the power semiconductor category (including both power discretes and power modules) behind Infineon.
Fairchild makes semiconductor ICs that control power supplies in electronics, with a portfolio of low- to high-power solutions. ON Semiconductor also makes power supply chips, along with semiconductors for mobile phones, as well as for medical and consumer products.
Overall in 2015, chip companies have announced nearly $100 billion in mergers and acquisitions, including Avago Technologies Ltd.’s $37 billion purchase of Broadcom Corp., and Intel Corp.’s $16.7 billion acquisition of Altera Corp.
So, is this a watershed moment for the semiconductor industry as a whole and the power semiconductor segment in particular? Is there a larger trend to be seen, or a seminal lesson to be learned here?
A colleague asked on what I thought of the ON Semi purchase and I said that this acquisition, as the others that preceded it, will not have too much of lasting effect. Indeed, what came to mind was a quote from the late, great Yogi Berra, who once said: "It's like déjà vu all over again."
Here’s why: If you go back to 2002 and unearth a paper by N. A. Moguilnaia et al., presented at the IEEE Engineering Management Conference and titled “The investigation into the recent mergers and acquisitions in the power semiconductor industry,” you will see the authors noted that between 1999 and 2002, there were at least 20 spin-offs, acquisitions, or mergers specifically related to the power semiconductor industry.
The authors wrote, “While process technologies and manufacturing science were crucial in the early stages of the semiconductor industry, manufacturing efficiency and management of manufacturing costs have more recently become the focus of participants in the industry.”
This is still true and a good part of the reason why mergers and acquisitions are once again very popular. In this case, ON Semiconductor said it expects to save about $150 million a year once the sale is completed. Since the deal was announced by civic officials in South Portland, ME, which was the headquarters of Fairchild until 2011 when it moved to San Jose, California, have expressed concern that the acquisition might result in the closure of a chip fabricating plant on Western Avenue that is older than those owned by ON Semiconductor.
Commenting on the acquisition, Keith Jackson, president and CEO of ON Semiconductor says that Fairchild “was a company that looked like it was going to do a transaction.” Indeed, ON's offer beat out of Infineon Technologies as well as STMicroelectronics, which was considering a bid for Fairchild before dropping out of the competition last month. In January of this year, Infineon bought International Rectifier Corp. for about $3 billion in cash.
ON’s move was also aimed to prevent China's Tsinghua Unigroup Ltd. from acquiring Fairchild. Tsinghua is a subsidiary of Tsinghua Holdings, solely owned by Tsinghua University and a company that had acquired several of China’s design firms over the past year. Tsinghua is considered to be an important player in the Chinese government’s stated goal of boosting the country’s chip sector.
In 2002, N. A. Moguilnaia and his colleagues wrote, “Mergers and acquisitions also represent an opportunity to achieve economies of scale and scope and pare operating costs, or to increase their capabilities and innovative capability.” In 2015, ON’s president Jackson said one reason for buying Fairchild was “improving the scale of the company in the overall analog and power chip market” and that they were combining “two large cash flow generating businesses to create a premier power and analog semiconductor company."
Whoever first said there is not much new under the sun got it exactly right.
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