• Chipmakers aim at lucrative cloud data centre market
• 2020 is turning out to be a blockbuster year for chip M&A, with year-to-date deals topping $100b.
• Big-ticket deals could face increased scrutiny due to wide-ranging issues such as strict antitrust laws, national security threats, access to proprietary technology and sanctions imposed under trade disputes.

The semiconductor industry is set to witness more consolidation among manufacturers despite geopolitical tensions between the US and China and stringent regulatory scrutiny serving as impediments to deal completion.

Chip M&A activity had a quiet first half of the year, as Covid-19 created high levels of uncertainty and steep drops in GDP. The pandemic remains a severe problem for many major economies, but the improved business sentiment and a gradual economic recovery have fostered a strong climate for M&A.

Arun Menon, Lead Analyst at MTN Consulting, said in a blog post, that M&A activity in the semiconductor landscape ramped up significantly this year, nearing the record levels of 2015, and the surge was particularly notable during the second half of 2020.

These deals targeted many end-use markets but the common thread is the cloud data centre market -remote work and study amid the Covid-19 pandemic has spiked demand for cloud-based tools and services

With year-to-date announced deals already topping $100 billion in value, 2020 is turning out to be a blockbuster year for chip M&A.

The mega-deal kickstart to the chip M&A frenzy was Analog Devices’ $20.9 billion acquisition of rival chipmaker Maxim Integrated Products in July this year, followed by Nvidia’s acquisition of chip design house Arm for $40 billion in September, the $9 billion acquisition of Intel’s NAND SSD business by SK Hynix in October, AMD’s $35 billion deal to acquire Xilinx, and Marvell’s $10 billion acquisition of Inphi.

Obstacles remain

Menon said that none of the big chip deals is focused narrowly on a single end market, but one key market is of common interest to all – the cloud data centre.

“The deals differ from each other in terms of sub-market focus, though, stretching from power engineering and networking to computing and storage,” he said.

Moreover, he said that the M&A activity in the chip market landscape is likely to continue into next year, but probably not at the scale of what has transpired so far in 2020.

Even though the deal-making drivers discussed above will persist in 2021, he said the future deals may confront more obstacles related to Covid-19 and geopolitics.

With Covid-19 expected to play out well into 2021, he said the delays in deal-making would keep the deal volumes limited as carrying out negotiations, due-diligence, and audits would be challenging with travel restrictions and limited in-person meetings.

Huawei benefits

“For companies having long-term or strong working relationships with prospective acquirer or targets, the pandemic would be less of a worry, as seen with Nvidia-Arm or AMD-Xilinx for instance. These pairings shared strong working relationships before the acquisition,” he said.

“Geopolitical tensions between the US and China upset the stability needed to make M&A deals happen. That’s especially true in the chip sector. With the situation not expected to get any better even under the Biden administration, China has been gearing towards chip self-sufficiency by pouring billions of dollars to support the growth of its domestic chip industry and advanced chip development.

Furthermore, he said the open-source chip architectures such as RISC-V have opened the gates for Chinese tech firms like Huawei. Chipmakers will be wary of snapping up companies amid a hostile business climate.

“Big-ticket deals are subjected to increased scrutiny due to wide-ranging issues such as strict antitrust laws, national security threats, access to proprietary technology, and sanctions imposed under trade disputes. All the chip M&A deals discussed above are pending regulatory approval, in multiple jurisdictions,” Menon said.

The Nvidia-Arm deal is likely to raise eyebrows among the watchdogs, especially in Europe and China. China could essentially prove to be a spoilsport in the Nvidia-Arm deal.

Chinese tech firms currently use UK-based Arm’s intellectual property to design chips, which could change post-acquisition by US-based Nvidia. If China blocks this transaction, he said that it would not be the first time.

Two years ago, China blocked US-based Qualcomm from completing its acquisition of the Netherlands-based chipmaker NXP Semiconductors.

Three key factors fueling M&As

• New applications: Key emerging applications based on AI/ML along with new evolving markets in edge computing, self-driving vehicles, and 5G have opened new frontiers for chipmakers. This is in addition to the ever-increasing demand for more media-intensive content such as images, audio, and video streaming over cloud that require faster server processors and networking capabilities for seamless and speedy transmission to end-users.
• Faster time to market: Apart from the obvious reasons of expanding into new markets and accessing proprietary technologies, chipmakers are increasingly exploring M&A to cut down on the costly and lengthy R&D timeline associated with developing advanced process nodes and chips, thus enabling faster scaling. The slowdown in Moore’s law is also pushing chipmakers to look elsewhere.
• Improved market conditions: A low-interest-rate environment has enabled chipmakers to borrow modestly and finance acquisitions. Rising stock prices are also aiding large chipmakers such as AMD and Nvidia to fund their purchase either partially or entirely in stocks. Notably, Nvidia surpassed Intel as the largest US chipmaker by market cap in July 2020.