mergers and acquisitions

With the emergence of consolidation as a potent engine of semiconductor industry growth, global mergers and acquisitions are sweeping the industry as companies look to accelerate advances across segments including data centers, AI, IoT and automotive chips.

Charles Shi, Principal, Senior Analyst, Needham & Company, LLC., recently offered an upbeat assessment of the electronic design automation (EDA), silicon intellectual property (IP) and services industries, or what SEMI refers to as the electronic system design (ESD) ecosystem.

The state of Penang, nestled along the northwest coast of Peninsular Malaysia, needs no introduction in the global electronics manufacturing sector. Despite its diminutive stature with just over 1,000 square kilometers of land area and a 1.8 million-strong population, Penang commanded an estimated 5% of global semiconductor exports in 2019, according to data compiled from the Department of Statistics Malaysia (DOSM) and UN Comtrade. The State’s transformation, from a traditional seaport economy into the Silicon Valley of the East, began in the 1970s, when the establishment of Malaysia’s first free trade zone in the State drew key investments from eight Multinational Corporations (MNCs). These pioneering investors – Intel Corporation, Hewlett Packard (now Keysight Technologies and Agilent Technologies), Robert Bosch, AMD, Litronix (now Osram Opto Semiconductors), Hitachi (now Renesas), Clarion and National Semiconductor[1] – sparked the development of a robust ecosystem of ancillary industries, which formed a foundation for the State’s rise as a prominent, offsite manufacturing hub. Today, Penang houses more than 350 MNCs that are supported by over 3,000 manufacturing-related SMEs. As Penang flourished as a vibrant, regional E E manufacturing hub, the local talent pool steadily accumulated a wealth of business intelligence and technical experience, enabling the robust supply chain to evolve in tandem with technology megatrends. This, in turn, enabled the State to focus on pursuing investments that have propelled the industry up the value chain, away from its beginnings as a low-cost manufacturing hub. Consequently, Penang has seen a proliferation of upstream technology-related investments in high value-added functions in recent years, ranging from research and development (R D), design and knowledge-based solutions, and downstream advanced manufacturing and testing to global business service (GBS) and Centre of Excellence (CoE) activities. Penang’s growing significance in the global E E value chain is demonstrated by its steady and resilient export performance in recent years. From 2014 to 2019, the State’s E E exports grew at a compounded annual rate (CAGR) of 12% to reach RM210 billion (US$51 billion). It has emerged as a hub for professional, scientific and controlling instruments (including medical technology), with exports of these products growing at a 5-year CAGR of 15% to reach RM23 billion (US$6 billion) in 2019. E E products, alongside professional, scientific and controlling instruments, collectively contributed between 77% and 82% of Penang’s total annual exports since 2014, and accounted for 50% of Malaysia’s exports in these two segments during the period. More impressively, despite the disruptions from the COVID-19 pandemic, Penang’s total exports continued to rise in 2020, growing 7% year-on-year to RM310 billion (US$75 billion), and a further 14% year-on-year in January and February 2021, driven by strong global demand for semiconductors. Shaping up as the destination of choice for advanced manufacturing investments As part of efforts to move Penang’s industry up the value chain, the State government has placed emphasis on attracting companies with strong commitments in implementing Industry 4.0 and sustainable investing. These efforts have yielded positive results, with the state having gained traction as a hub for advanced manufacturing investments. This is evidenced by the rising trend in investments per new job creation, which saw a six-fold jump from 2012 to 2020, as well as the number of global heavyweights announcing new investments as well as expansions of existing facilities in the State in 2019 and 2020. Penang attracted RM31 billion (US$7.5 billion) in approved direct manufacturing investment inflows in 2019 and 2020, 88% of which involved investments into the E E, equipment and medical technology industries. Prominent new investments included those from Lam Research, Bosch Group, Ultra Clean Holdings, Dexcom as well as Smith+Nephew. Together with planned expansions by a number of existing MNCs in Penang, these new investments, which are on track to commence operations between 2021 and 2023, are poised to bring Penang’s industry to greater heights and further integrate the State into the global value chain. Recent Notable Direct Manufacturing Investments in Penang Source: InvestPenang and respective companies Penang’s conducive business environment nurtures successful homegrown technology companies Penang’s conducive business environment has not only proven successful in attracting foreign direct investments (FDIs), but also successfully nurtured local E E success stories of locally employed engineers turned technopreneurs, who have founded and built companies that have successfully grown to become internationally renowned in their own right. These homegrown E E companies play crucial roles in the ecosystem, particularly in the areas of automated test equipment (ATE), automation, outsourced semiconductor assembly and testing (OSAT) services, electronics manufacturing services (EMS), precision engineering and tooling. The past five years have also seen the emergence of young, fast-growing Penang-based companies such as Experior, Oppstar Technology and Skyechip, which provide IC design and IC test design services to MNC clients globally. Public-private partnerships cultivate Penang’s talent development roadmap The state is cognisant that the development of a robust and skilled talent pool is imperative to support the growth of strategic industries in Penang. Strong public-private partnerships with concerted efforts in supporting talent development are key to Penang’s continued success. Toward this end, the State government has backed Penang Skills Development Centre’s (PSDC) industry-led training and education efforts, which have helped train over 200,000 of workers to support the industry’s needs since 1989. The State has also coordinated collaboration for industries to provide input to local institutions of higher learning on the relevance of the institutions’ courses, and rallied the industry to support State-run scholarships (Penang Future Foundation) and STEM initiatives. Holistic initiatives to make Penang a world-class investment destination for global frontier companies The dynamics of the global value chain, especially for the technology sector, have evolved rapidly since 2018, particularly amid the complex confluence of trade protectionism, COVID-19 pandemic-driven issues and disruptive technologies. The State government believes that strong, geographically localised industry clusters could help companies mitigate the risks of supply chain disruptions, in addition to improving companies’ time-to-market at a lower cost. To further increase Penang’s attractiveness for high quality investments, the State is focusing on three key strategies: Extending its competitive edge in advanced manufacturing, further strengthening Penang’s industry clusters, which include expediting SMEs’ Industry 4.0 transformation journey, and nurturing more homegrown companies to penetrate the global supply chain Embarking on a continuous drive to develop and recruit talent to the State, as well as cultivate the younger generation’s interest in STEM Enhancing Penang’s liveability with a strong focus on making Penang a smart and green city The State government is committed to continue developing Penang in a holistic manner, with the aim of creating a vibrant business and investment destination with a robust and sustainable economy and high standard of living, creating a conducive environment to “work, live, learn, play and invest.” About InvestPenang InvestPenang is the Penang State Government’s principal agency for promotion of investment. Its objectives are to develop and sustain Penang’s economy by enhancing and continuously supporting business activities in the State through foreign and local investments, including spawning viable new growth centres. To realize its objectives, InvestPenang also runs initiatives like the SMART Penang Centre (providing assistance to SMEs), Penang CAT Centre (for talent attraction and retention) and i4.0 seed fund (a catalyst for the start-up ecosystem). For more information, contact [email protected]. InvestPenang also works closely with various industry associations, including SEMI, to promote Penang’s supply chain and E E ecosystem. InvestPenang is delighted to have collaborated with SEMI on numerous occasions since 2015 and endeavours to sustain the partnership in the years to come, including for the SEMICON SEA 2022 exposition to be held in Penang. [1] No longer present in Penang following a corporate M A exercise.

U.S. consumers are flush with cash, the American economy is hurtling back from the depths of the COVID-19 pandemic, and the semiconductor industry is flying high on skyrocketing chip demand, with chip equities soaring since the initial outbreak in early 2020 as virus outbreaks worldwide supercharged demand for the digitization of everything from factories to home offices. “Wow, what a difference a year makes,” said Jennie Raubacher, Global Head of Semiconductor Electronics Investment Banking at Wells Fargo, speaking at a recent SEMI webinar. The two rounds of government stimulus payments in 2020 and 2021 gave many U.S. households the safety net to withstand the heaviest blows dealt by the COVID-19 pandemic and stoked consumer spending that has helped lift a hobbled economy. Durable goods spending in the U.S. has also seen a sharp rebound, surging more than 60% from its April 2020 trough, Raubacher said. The twin forces have driven a blistering U.S. economic recovery after GDP shrunk about 10% by the second quarter of 2020 only to bounce back in the first quarter of this year to roughly $19 trillion, regaining the lost ground to match the GDP charted at the end of 2019. With the U.S. economy continuing to gain steam, inflation has, as expected, edged higher, with price increases particularly acute in used vehicle and lumber markets. Despite surging prices, Wells Fargo sees inflation moderating as durable goods demand slows, easing pressure on interest rates, Raubacher said. Equity Valuations at Record Highs Heady semiconductor stock prices are not new. Over the past 15 years, equity prices of chip companies in the S P 500 have grown more than 460%, outpacing the 230% jump in value of the S P 500 index overall, Raubacher said. And chip stocks continue to shine. Since early 2020, when the spread of COVID-19 hit its rapid clip, the recognition of the growing importance of chips to economies around the world has exploded. That dynamic joined secular technology trends including autonomous driving development, industrial and factory automation, 5G infrastructure buildouts, data center expansions, and smart city and smart home innovation fueled by the Internet of Things (IoT) as key drivers of semiconductor stock valuations. With its price/earnings (PE) ratio now at more than 21x, the S P 500 is well above its historical average of 15x PE. “The S P 500 valuation is at record high any way you look at it, and valuation multiples across the board, currently at 3x Next Twelve Months revenue, have increased dramatically from historical averages,” Raubacher said. Semiconductor stock valuations are on similar trajectory, with the SOXX index now at 15x Next Twelve Months EBITDA (earnings before interest, taxes, depreciation and amortization). “While semiconductor stocks may seem highly valued compared to historical levels, the chip industry has grown faster and expanded profitability by a wider margin than S P 500 companies,” Raubacher said. With that differential, “semiconductor equities are not as expensive as they may seem at first glance.” Earnings expansion and valuation multiple increases for the chip industry over the past 15 years have translated into a more than 500% jump in market capitalization, compared to a 300% increase for the S P 500 excluding chip companies, she said. Chip company revenue growth in the first quarter of 2021 was predictably low due to seasonality, dipping 2.4%, though dropped less than the historical average, Raubacher said. Second-quarter revenue growth for the industry is expected to hew to the historical average of 6%. Semiconductor growth forecasts by market analysts for 2021 range widely from 6% to 17% year-over-year, she added. Chip Companies Raise Capital at Record Pace In 2020 and 2021, semiconductor companies have raised an unprecedented $82 billion in capital to finance maturing debt and acquisitions, a wave that will “likely catalyze further consolidation in the sector,” Raubacher said. None of the financing has stemmed from liquidity crunches. Since Raubacher joined Wells Fargo 10 years ago to lead its semiconductor practice, the group has executed more than 175 transactions including $40 billion in mergers and acquisitions and $360 billion of financing for its semiconductor industry clients. “With a strong macroeconomic backdrop and demand environment, relatively low interest rates, semiconductor companies showing strong business fundamentals and robust valuations, we expect a pickup in M A activity,” she said. Growth Forecast Across Most Semiconductor Applications The next four years will see the chip industry grow across most applications including wireless communications, consumer electronics, transportation and medical. Automotive and industrial/aerospace will lead the way, expanding at an expected compounded annual growth rate of 14% and 10%, respectively, from 2020 to 2025 to “drive a significant portion of the TAM expansion during that period,” Raubacher said. Across all applications, the semiconductor industry is expected to grow at a 6.8% CAGR from 2020 through 2025, adding $183 billion in revenue by the end of the forecast period, she said. ESG Rises in Importance For their part, investors now focus on more than pure business performance when valuing individual companies. The ability of businesses to reduce their carbon footprint, promote workplace diversity and take other steps to serve the greater good as part of Environmental, Social and Governance (ESG) programs are carrying more weight in valuation models. “Investors are paying more and more attention to ESG initiatives and targets,” Raubacher said. “On the debt side, we’re seeing things like green bonds and interest rate reductions tied to ESG targets. Only a few semiconductor companies have incorporated ESG measures into their financing, so it’s still early days. It really comes down to the metrics you can track in your companies and the goals and targets you can commit to. It will be a very company-specific approach rather than an industry standard.” In the chip industry, Raubacher noted that ESG targets are geared not only to manufacturing equipment and processes in fabs and other semiconductor facilities throughout the supply chain, but increasingly also to chips themselves. As technology innovation continues to spur the development of chips to power more electronics for consumers and businesses, their proliferation comes at a cost: greater energy consumption. The upshot is that semiconductor makers are becoming more focused than ever on power-efficient designs to bolster their ESG initiatives, Raubacher said. Many semiconductor players across the supply chain are reducing their carbon footprint by switching to energy-saving equipment and reducing water waste, Raubacher said. At the same time, more semiconductor executives are recognizing the rising importance of highlighting corporate achievements across all aspects of ESG. More Governments See Vital Importance of Semiconductors As shelter-in-place orders took hold in countries worldwide after the initial COVID-19 outbreak, work-from-home offices, online shopping, virtual classes and remote doctor’s visits became the norm. The electronics at the heart of this connectivity – born of both necessity and convenience – and the chips that power them took on outsized importance around the world. Geopolitical skirmishes intensified and supply chains across the semiconductor industry were reimagined and redrawn. Governments jockeyed for advantage in the race to build new semiconductor manufacturing facilities and upped their chip investments. An acute chip shortage that started in the automotive industry and quickly spread to other sectors magnified just how pervasive and vital semiconductors had become in making the world go round. “There’s no question that the semiconductor industry is vitally important to global and national economies as governments around the world now recognize its strategic importance,” Raubacher said. That puts the industry in an even stronger position to help lay the regulatory groundwork for its own future. “There’s a unique opportunity for semiconductor industry executives to shape the public policies that could impact the direction of the industry for the next 30 years,” she said. More than 750 people attended the June 2nd webinar, Surging Chip Demand, Digital Transformation, and the Pandemic – What’s Next?, sponsored by SEMI members Brooks Automation, Hitachi, JECT, KLA and TEL. Sven Smit of McKinsey Company also delivered his talk Leading in COVID-19 Exit at the event.