Analysts in equity markets have been predicting a further round of merger and acquisition activity across many markets in the next twelve months. At first Adam Fletcher, chairman of the International Distributors of Electronics Association (IDEA) and the UK’s Electronic Components Supply Network thought their optimism might be misplaced, given the economic uncertainties of the COVID-19 Pandemic but at least one recent event has proved them to be correct: In July ’20 Analog Devices Inc announced that it planned to acquire Maxim Integrated Products Inc in an all- share transaction valued at $21B, subject of course to regulatory approval: In this article Fletcher, provides an overview of the proposed ‘mega-merger’ and shares his thoughts on what it could mean for our industry. …
by Adam Fletcher, CEO of ecsn and of IDEA
Everything is Analogue
The electronic components supply network is a customer service business and despite digitisation of many of the processes it remains ‘a people to people business’, whether that be internal or external to the organisation.
It’s a subject much debated but it’s fairly likely that the observation “everything is analogue” can be attributed to Dr Karl Popper, one of the 20th century’s most influential philosophers of science. It’s still true: Analogue electronic components remain critical in Power Management, RF, Communications and Interface circuitry and are used in almost all electronics applications. Semiconductor technologists expend much intellectual time in their efforts to improve analogue signals, typically converting them to a digital representation capable of being processed by a microprocessor or microcontroller, before converting the signals back to analogue once again. Designing and manufacturing Analogue semiconductors is often described as a ‘dark art’ because a very detailed understanding of the physical properties of the combinations of materials used and how they react as they are processed and then used within the target application is essential in order to achieve the required performance.
As Analogue manufacturing processes use older more established technologies with much larger feature sizes than the latest digital semiconductors the design costs for an Analogue device are much lower. In addition, the product life cycle for analogue products is often twice that of digital semiconductors, which is typically under five years, A new analogue device is often a derivative of an existing well established product and typically integrates peripheral passive components or improves specific key electrical parameters required by the application. The TAM (total available market) for Analogue semiconductors is much smaller than the Digital semiconductor TAM. According to market analyst IC Insights the Top 10 Analogue semiconductor manufacturers accounted for close to 62% of the TAM in 2019, reporting combined sales of $34B out of a total of $55B. For comparison, the Top 10 Digital semiconductor suppliers (only Texas Instruments is ranked in the Top 10 for both Analogue and Digital) had an estimated combined sales revenue of $261B in 2019, a figure that suggests that Analogue semiconductors account for approximately 20% of the total semiconductor market.
Analogue Semiconductor Acquisitions
Investors have always considered Analogue semiconductor companies to be very stable organisations, often founded and initially led by physicists or mathematicians who were personally responsible for many of the designs and patents held by the organisations. Whilst many Analogue companies have made acquisitions in the past these were usually low-cost affairs carried out to acquire a specific technology or access to a market sector rather than to boost market share or economies of scale. In 1990 Analog Devices acquired PMI and in 2000 Texas Instruments (TI) acquired Burr Brown for $7.6B. A major change came in 2011 when TI announced it had acquired National Semiconductor – at the time one of the market leaders in Analogue – for $6.5B, propelling TI up to the top of the Analogue supplier rankings. Five years later Analog Devices surprised the market by acquiring Linear Technology (LTC) for $14.8B followed by its announcement in July this year of its intention to buy Maxim Integrated Products for $21B. If this deal goes through Analog Devices will remain the second largest analogue semiconductor supplier but will be baying at the heels of TI, which currently has a 19% share of the TAM.
The M&A processes inevitably throws up an overlap in a wide range of job functions and particularly with electronic components companies, also within the Channel Partner (authorised distributor) network. There is a mutual dependence between the direct and in-direct customers of a semiconductor manufacturer. Sales to direct customers keep manufacturing volumes high and enable economies of scale to be realised. Approximately 60% of all semiconductor products by sales revenue value are sold directly by the manufacturer to a small number of very large customers and sometimes even to a single customer, but they are generally able to realise much better margins on the indirect sales made by their Channel Partners. These third-party companies jointly account for >40% of the semiconductor TAM and often number their customers in the 1,000s. That said, the spread of Analogue semiconductor customers is very wide and highly diffused, making it a highly challenging market to address, but manufacturers embrace the security that a wide diversity of indirect customers and applications brings to their business and recognise that sales made to these customers mitigate the potential risks posed by any over-reliance on a small number of direct customers.
By any measure effective communication with customers is an essential part of the M&A process. No semiconductor company wants to alienate its customer base and will make every effort to provide it with accurate and timely information. However, recent experience shows that the provision of this information often lags a long way behind the implementation of other activities, probably reflecting just how critical all the other Executive Management actions are to the merged organisation. Fortunately, the trade media, email and social media platforms provide fast and wide dissemination of information, be it positive or negative, which of course depends on the recipients’ perspective. Such communication will often raise a multitude of questions, the answers to which may be commercially sensitive or yet unknown. In these circumstance competitors are often perceived as being the more effective communicators as they seek to gain a competitive advantage during the period of reorganisation.
In the current market Analog Devices is being very brave in making a large and what appears to be a very expensive acquisition, but the financial analysts must be able to see a positive outcome for long-term earnings. As AD and Maxim combine there will inevitably be some disruption within the supply network which hopefully can be minimised by effective communication. I urge all organisations to engage effectively with their supply network partners, in the current economic climate it’s a simple and effective way to help to boost your organisation’s performance.