ADI Analog Devices Inc

By Don Clark 

Slowing growth and rising costs are driving a historic wave of consolidation among semiconductor makers looking to streamline their organizations and product lines.

So far this year, chip companies have announced $100.6 billion in mergers and acquisitions, according Dealogic, exceeding the $37.7 billion total for all of 2014.

There have been fewer deals--276 announced so far this year, compared with 369 in 2014, Dealogic says. But the deals are larger, including Avago Technologies Ltd.'s sector-record $37 billion purchase of Broadcom Corp., announced in May.

The totals could go higher. Bloomberg reported last week that four chip companies-- Analog Devices Inc., Maxim Integrated Products Inc., SanDisk Corp. and Fairchild Semiconductor International Inc.--were in talks concerning different deal options. Representatives of those companies declined to comment.

"It's buy or be sold," summed up Alex Lidow, chief executive of Efficient Power Conversion Corp., a startup he co-founded in 2007 after 30 years leading chip maker International Rectifier Corp.

Chip makers have long used acquisitions to obtain new technology. But many recent deals resemble consolidation waves in older industries, motivated mainly by trimming costs in areas like manufacturing, sales and engineering.

Avago, for example, has projected it can wring $750 million in annual savings beginning in 2017 after swallowing Broadcom. That transaction was the largest high-tech acquisition on record before Dell Inc. announced its $67 billion plan to buy EMC Corp. last week.

In part, chip makers are responding to intense competition that is crimping revenue. Chips are as important as ever, and now appear in a broader range of everyday products, including cars, appliances and other gadgets in homes and businesses.

But Gartner Inc. this month projected that world-wide semiconductor revenue would decline 0.8% this year, the first dip since 2012. The research firm predicts sales will grow 1.9% in 2016, to $344.1 billion.

Reducing the number of suppliers can ease price competition, and help the survivors combine complementary product lines, industry executives say. That saves money on sales efforts while allowing companies to sell a great number of chips that in some cases can be tailored to work better together. For example, Intel Corp. says its planned $16.7 billion acquisition of Altera Corp. will let it craft new products to improve hardware like server systems.

"Customers more and more want to have fewer suppliers and more value, and pieces that work together," said Jalal Bagherli, chief executive of U.K.-based Dialog Semiconductor PLC, after announcing a $4.6 billion acquisition of its deal for Atmel Corp. last month.

At the same time, the cost of designing new chips continues to escalate, as Moore's Law allows chip makers to squeeze more circuitry on each square of silicon. Designing a chip with more transistors takes longer and costs tens of millions of dollars more than earlier technology.

Companies like Intel that sell huge volumes of particular products can take those costs in stride. But others developing products for smaller markets can't expect to generate enough revenue to cover development costs. New entrants from China and Taiwan add to pricing pressure.

"We now have a combination of slowing growth in a mature market, along with an increase in the cost and the complexity of being in the semiconductor industry," said Mark Edelstone, a managing director at Morgan Stanley, which advises chip makers on mergers and acquisitions. "That combination is challenging."

Some chip makers that specialize in older analog technologies--used for chores like converting voltages and measuring temperatures--have suffered less from competition. But they have begun feeling pressures from slowing growth, too.

One example is Mr. Lidow's former company, founded in 1947 by his father and grandfather. International Rectifer in January was acquired by Germany's Infineon Technologies AG for about $3 billion, a deal whose stated motivations included melding two lines of power-management chips. Mr. Lidow, shying away from the battle to build a new business in silicon chips, opted after leaving International Rectifier in 2007 to start a company focusing on gallium nitride, an alternative material that is being used instead of silicon for applications like managing power in electronic devices.

As the chip industry matures, the age of some leaders is also a factor. One example is Raymond Zinn, 78 years old, who led Silicon Valley chip maker Micrel Corp. for 37 years. The company agreed to an $839 million buyout from Microchip Technology Inc. that closed in July.

"You have CEOs who are getting older," said Dan Niles, a longtime industry watcher and founding partner at investment management firm Alpha One Capital Partners. "To some extent it's the changing of the guard."

Write to Don Clark at don.clark@wsj.com

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(END) Dow Jones Newswires

October 18, 2015 16:59 ET (20:59 GMT)

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