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Posts Tagged ‘mergers’

Rhines Expounds on the Deconsolidation of the Semiconductor Industry

Wednesday, April 27th, 2016

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By Jeff Dorsch, Contributing Editor

“By 2020, we are all going to work for the same company,” Wally Rhines, chairman and chief executive officer of Mentor Graphics, said Tuesday morning (April 26) in his keynote presentation at Mentor’s U2U user conference in Santa Clara, Calif.

Taking “Merger Mania” as his theme, the veteran electronic design automation and semiconductor executive reviewed the merger-and-acquisition activity of 2015, some of which is extending into this year. Rhines noted that several of the big acquiring companies in last year’s wave of industry consolidation had names beginning with the letter “M,” while some of the acquired chip enterprises had names beginning with the letter “A.” That, he joked, was the genesis of “M&A” in 2015.

On a more serious note, the Mentor CEO challenged the conventional wisdom that the industry experienced unprecedented deal-making and combination in 2015. The number of deals involved, 30, wasn’t a record, he said. It was the “magnitude” of valuations in those transactions, with a number of multibillion-dollar acquisitions, he added.

The top 10 semiconductor suppliers in the world have changed dramatically since the 1950s, as the industry has transitioned from germanium transistors to silicon-based integrated circuits made with a bipolar process, metal-oxide-semiconductor memory chips, memories/microprocessors, and system-on-a-chip devices, according to Rhines.

The industry market share of the top 50 chip companies has actually declined for many years, through 2014, he noted. “We’re still on a deconsolidation path,” Rhines asserted. “The dynamics of the industry change.”

While the industry was selling 50 percent of its chips for computing applications a decade ago, and 25 percent for communications, the trend has lately shifted, with communications overtaking computers as the leading application, although the line between communications and computing is getting blurrier, Rhines noted.

“Why the acceleration in mergers?” Rhines wondered. The chief factors generally credited are economies of scale, financial leverage, and regulatory/government mandates, he listed.

Despite all the combinations over the years, there is scant evidence that mergers always mean higher profit margins, compared with revenue figures, Rhines said. “There is no correlation between size and profits,” he noted. “It’s not an automatic formula for success. Maybe scale isn’t the answer.”

A more compelling reason for the wave of mergers is “very cheap money,” with historically low rates on corporate loans, Rhines noted. Tax advantages, especially on tax-inversion deals, seem to be fading as an incentive to merge, as the federal government is making it more difficult for large corporations to move their headquarters out of the United States and minimize their tax obligations to the U.S., according to Rhines.

That brings in the consideration of regulations and government mandates. China is engaged in a five-year program to create “greater self-sufficiency” for its domestic semiconductor industry, the Mentor CEO said. Instead of directly subsidizing the growth of semiconductor manufacturers and chip-related suppliers, China’s central government is taking equity stakes in private-equity firms that are making investments in the semiconductor industry, sometimes seeking to acquire companies in the U.S. and around the world, or to take an ownership stake in key companies.

Research and development spending by semiconductor companies goes up and down depending on industry revenue, yet it generally remains flat as a percentage of revenue – typically around 14 percent of revenue, according to Rhines.

Still, “long-term interest rates can’t stay low forever,” he concluded. “Merger mania will be limited.”

In an interview following his keynote, Rhines expounded on the theme of the learning curve – a concept that encompasses Moore’s Law and other observations of technological change. In addition to talking about the learning curve in his keynote, Rhines also wrote about in a recent blog post.

Moore’s Law presents a “limited set of knobs to turn,” he observed. For years, “the most productive thing to do is shrink” the dimensions of ICs, he said. While the demise of Moore’s Law has long been predicted, “the cost per switch/transistor will always be going down,” he added. “You will always see an improvement.”

The Internet of Things is widely touted as the next market to boost the fortunes of the semiconductor industry. IoT could force the industry to “improve enough to enable another application, like wireless,” Rhines said.

In general, the industry is facing substantial manufacturing challenges in getting down to the 16/14-nanometer process node and smaller dimensions. “Every generation has a new physics problem to solve,” Rhines observed. “Complexity grows.”

Chip designers and manufacturers are now dealing with electromigration issues and thermal problems, he noted. EDA is taking on these challenges while also pivoting to the wider considerations of system design, rather than chip or board design, Rhines said.

“Forty percent of our revenue comes from system design,” the Mentor CEO said. Designing systems for automotive vehicles, military/aerospace systems, medical equipment, and other areas represents a $2.5 trillion market in total, compared with about $350 billion for semiconductors, on an annual basis.

Faced with declining revenue and profitability in the 2016 fiscal year, Mentor Graphics offered a voluntary early retirement program for veteran employees, and dozens of them took the buyout benefits, Rhines noted. This represented “a forcible evolution of the company,” he said. “We were going to lose a significant amount of corporate learning.”

While somewhere between 110 and about 200 employees took early retirement, Mentor actually increased its headcount last year, from 5,558 full-time positions as of January 31, 2015, to around 5,700 positions on January 31, 2016.

What about retirement for Rhines, who will celebrate his 70th birthday in November of this year? “I haven’t actually thought about it,” he said in the interview. While carefully noting, “I serve at the will of the board,” Rhines added, “I’m not looking for another job.” He still has the “energy level” for all those red-eye flights to meet with customers, he said. “I don’t play golf,” Rhines commented. “I like a lot of pressure, crises. I love the relationships I have with customers, employees.”

The Rhines keynote was followed Tuesday morning by a keynote from Zach Shelby, vice president of marketing for the Internet of Things at ARM Holdings, who spoke on “Driving Beyond IoT.”

Shelby noted the history of computing, communications, and networking in recent decades. “It takes an ecosystem,” he asserted. ARM, he said, is not just a fabless semiconductor company; “we’re silicon-less,” he said, since ARM is involved in developing and licensing technology for other companies to use. The IC design company works with operators of cloud services, network operators, system integrators and end-users around the world, according to Shelby.

The industry trend is going “from embedded to connected, reaching millions of developers,” he said.

While some see automotive vehicles as “expensive mobile phones,” Shelby said, “They’re becoming autonomous drones.” He added, “The auto is the ultimate intelligent connected device.”

Rhines and Shelby later participated in an afternoon panel session titled “Ripple or Tidal Wave: What’s Driving the Next Wave of Innovation and Semiconductor Revenue?” Also on the panel were James Hogan of Vista Ventures, Brad Howe of Altera, and Kelvin Low of Samsung Semiconductor.

Dow, DuPont to Merge in Combination of Chemical Giants

Friday, December 11th, 2015

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By Jeff Dorsch, Contributing Editor

In a deal with significant implications for high-tech chemicals and materials, The Dow Chemical Company and E. I. du Pont de Nemours and Company (DuPont) have agreed to merge, forming the second largest chemical company in the world, behind BASF SE.

Once combined and known as DowDuPont, the company plans to split into three companies for agricultural chemicals, material science, and specialty products. The tax-free spinoffs will happen 18 to 24 months after completion of the merger, pending board and regulatory approvals.

The stock-swap transaction will create an actual merger of equals, according to Dow and DuPont, with the shareholders of each company holding about 50 percent of DowDuPont.

Dow also announced that it will take over full ownership of Dow Corning, its 50/50 joint venture with Corning.

Dow Corning, Dow Electronic Materials, and DuPont are all corporate members of SEMI, the industry organization for suppliers of semiconductor equipment and materials.

The $130 billion megamerger is expected to close in the second half of 2016, subject to shareholder and regulatory approval. Andrew Liveris, Dow Chemical’s chairman, president, and chief executive officer, will become executive chairman of DowDuPont, while Edward Breen, DuPont’s chairman and CEO, will serve as CEO of the combined company.

The material science spinoff company will include DuPont’s Performance Materials business and Dow’s Performance Materials and Chemicals, Performance Plastics, and Infrastructure Solutions businesses.

The specialty products spinoff will take in DuPont’s Electronics & Communications business and Dow Electronic Materials.

Jeffrey Stafford of Morningstar wrote this week of the rumored transaction, before the deal was announced, “Potential cost synergies would seem to be the most obvious avenue for value creation. For example, a combined entity could choose only the best products in the agriculture research and development pipeline and shutter the rest. We also wouldn’t be surprised to see job cuts across different divisions.”

Dow’s Liveris said in a statement, “This transaction is a game-changer for our industry and reflects the culmination of a vision we have had for more than a decade to bring together these two powerful innovation and material science leaders.”

Solid State Watch: November 25-December 4, 2014

Monday, December 8th, 2014
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Solid State Watch: October 23-30, 2014

Friday, October 31st, 2014
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