More deals seen in chips as Internet of Things blooms

[June 08, 2015]  By Liana B. Baker and Bill Rigby

NEW YORK/SEATTLE (Reuters) - With the biggest year in chip deals since 2000 not even halfway through, mid-sized semiconductor makers appear to be prime takeover targets as the largest players look to round out their capabilities and turn their focus to chips for cars, watches and other devices, making the "Internet of Things" a reality.

Bigger is better is the new mantra, as more technologies are being squeezed onto chips and customers want to deal with integrated suppliers that can offer the broadest range of products.

"You want to be the supplier that has the most capability," said Ernie Ruehl, managing director at Credit Suisse.

Credit Suisse advised NXP Semiconductors on its deal with Freescale Semiconductor, which kicked off the current wave of chip mergers in March, and was one of the advisers to Avago Technologies in its $37 billion deal for Broadcom Corp last week.

Bigger companies can better afford the ever-rising cost of design and manufacturing.

"A leading-edge design can cost $150 million to $200 million, which means that you have to be able to generate four times the revenue to get a return on investment," said Mario Morales, an analyst at tech research firm IDC.

Companies that make analog and mixed-signal chips - a mixture of analog and digital - are in demand, analysts said. Analog chips process real-world signals such as sound and light, so they are central to smartphones and devices connected to the Internet.

As a result, companies like Maxim Integrated Products Inc, Linear Technology Corp, Intersil Corp, Silicon Laboratories Inc, Analog Devices Inc and M/A-COM Technology are under the spotlight.

Another closely related subsector is microcontrollers, essentially small computers used in automatically controlled products like car engines or implanted medical devices. Smaller microcontroller makers include Atmel Corp and Renesas Electronics Corp.

The big chip makers, such as Intel Corp, Texas Instruments Inc and Qualcomm Inc, want to beef up in just those areas.

This thirst for growth has helped spur semiconductor stocks to new heights, with the PHLX Semiconductor Sector index last month hitting its highest since 2001.

As a result, valuations are growing, but not out of line with technology in general. Potential target NVIDIA Corp is trading at 24 times estimated profit for the next 12 months, and Xilinx Inc, Analog Devices and Marvell Technology Group are at around 21 times, according to Reuters data. Semiconductors as a group have historically traded about 15 times.

But high valuations have not stopped the pace of deals or the premiums companies are willing to pay as low interest rates provide a source of cheap capital. Intel is offering about 35 times expected earnings for Altera Corp.

After barely five months, $80 billion in semiconductor M&A has been racked up this year, according to Reuters data. In the last two weeks alone, Avago and Broadcom announced their deal and Intel moved to buy Altera.

More deal activity is brewing. Analog chip maker Exar Corp said last month it would look at strategic options. Cypress Semiconductor Corp has made an offer for Integrated Silicon Solution Inc but has so far been rebuffed. The chief executive officer of Lattice Semiconductor Corp told Reuters this week he was open to a sale, but only for a big premium.

(Additional reporting by Liana Baker in New York, Noel Randewich in San Francisco and Lehar Maan in Bangalore; Editing by Steve Trousdale and David Gregorio)

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