SAN JOSE, Calif. — A wave of mergers and acquisitions is reshaping Silicon Valley’s semiconductor industry as companies join forces to shoulder the soaring technology costs required to stay competitive.
Half a dozen chipmakers in Silicon Valley, including a few storied names, have changed hands in less than two years in nearly $12 billion in mergers and acquisitions affecting thousands of employees and costing some their jobs. In one merger 1,600 people are being laid off.
“The net winners are investors. The net losers are the employees who lose their jobs,” said Betsy van Hees, an analyst with Wedbush Securities.
In the biggest deal yet, Singapore-based Avago Technologies, which bought Silicon Valley’s LSI a year ago, announced Thursday that it will acquire Broadcom, an Irvine-based chipmaker and major supplier of integrated circuits for the mobile phone industry, for $37 billion in a cash and stock deal. The acquisition will create a $77 billion company, Avago said. While it is incorporated in Singapore, Avago — a spinoff of Hewlett-Packard’s semiconductor operation that went public in 2009 — says it is “co-headquartered” in San Jose.
With that announcement, key industry mergers and acquisitions pending or completed, including companies not in the valley, totaled more than $60 billion during the same period.
The targets of all this activity make a variety of specialty chips for industrial, automotive, mobile and storage applications and include valley companies Volterra Semiconductor, LSI, Omnivision Technologies, Integrated Silicon Solution Inc., Spansion and Silicon Image.
“We’re at a point where the cost of being at the leading edge is becoming prohibitive for all but the largest semiconductor companies,” said Mark Hung, an analyst with the technology research firm Gartner. Hung said it can cost $100 million to produce a leading edge chip. “It’s very different from decade ago, when you could get a viable chip done with $10 million to $30 million dollars,” he said.
“Even fairly big companies really cannot afford to stay ahead of their competitors. That’s why you’re seeing this wave of mergers and acquisitions,” he added.
Chipmakers are dealing with the increasing expense of producing their devices as transistors sink toward the size of a few atoms, while at the same time getting ready for an expected wave of new applications for the Internet of Things and its billions of connected devices, analysts say.
The industry is still growing, but is undergoing a natural consolidation, said Mike Wyatt, head of global technology mergers and acquisitions for Morgan Stanley. “The semiconductor market is a huge market,” said Wyatt. “You really have to be a big player to compete effectively.”
Global semiconductor sales were $335.8 billion in 2014, with $173 billion of that in U.S. sales, according to the Semiconductor Industry Association.
The $6.6 billion acquisition of San Jose chip company LSI by Avago started the ball rolling after it was announced in December 2013, said Raymond James analyst Steve Smigie.
