One relatively quiet trend that has been building is an increase in mergers and acquisitions along the wider, global semiconductor and electronics supply chain. If you'd not noticed the quiet reshuffling going on in the background of the hype leading up to the various device and component announcements the past quarter, this week saw a little more activity than normal which ought not go unnoticed.
Why care about M&A?
It's really relatively simple, financial and market analysts watch for all types of indicators, one is the trajectory of mergers and acquisition (M&A) activity along supply chains. When there is a sustained and non-spurious increase in M&A activity, that's a pretty good sign that the companies that are buying are putting their financial and strategic bets on the table. Such a move implies that the wait-and-see time has passed and they choose to no longer wait either to ensure the (real?) direction of the market(s) in which they are intending to increase their strategic plays, or to get a better deal on the company they are wanting to acquire. If lower price targets seemed reasonable, or if longer time seemed available to play a strategic hand, the wait-and-see would continue.
Piecemeal M&A activity began around 2010, as companies looked to diversify and support strategic moves that could help maintain margins during the aftermath of the global economic recession. More notable M&A activity had really been the domain of the memory sector until this year. Along with the present rise in increased M&A activity, involving larger companies and strategic market endeavors, there is good reason to wonder if a serious tide is coming in representing the precursors of some real economic upswings.
If we look at Citi Research's "'Four Phase' framework of the EMS economic cycle," a model they have presented for a number of years now, the present movement of assets and increasing asset selling is positive (cf. Citi Research, 2013 Supply Chain Playbook+Q2'13 Preview, 2 July 2013, pp. 5, ff.). The increased activity may indicate the move into the more favorable Phase Three, which directly precedes the return to global economic growth in Phase Four:
Phase Two: OEMs also in-source production (i.e. shift it away from EMS) in the initial stages of a downturn in hopes of increasing utilization rates at company owned factories. […]
Phase Three: In the third stage of the cycle the OEMs typically engage in restructuring efforts during which they begin to incrementally outsource more and/or try to sell assets to EMS companies in return for the promise of future business. We believe this phase occurred in 2010/2011 as we saw asset acquisition transactions (Sanmina’s purchase of JDSU assets and Hon Hai’s coinvestment with HP for PC manufacturing capabilities). […] During 2009 to early 2011 the sector experienced this favorable phase.
Who's active presently?
Well, one long-running story has been the Micron purchase of Elpida, of course. That's really not new news, other than to say that in August the deal was completed. Why bring it up now? Well, one of Apple's important memory suppliers has been Elpida; with a new set of phones released and a changing relationship with Samsung as another important memory supplier, Apple's newly released iPhone 5 series and upcoming October release expectations, positive demand for the new Apple devices will be important to Apple's immediate supply chain and supporting suppliers.
Recently, Microsoft's acquisition of Nokia is worth considering, particularly in light of the question of smartphone penetration levels reaching initial saturation points in high-end, mature markets, and the strategic market positions that Nokia holds in emerging markets. Recall, Nokia was really among the big news items back in the Spring at Mobile World Congress (MWC), and their full suite line up of phones covering high-priced, high-end devices through low-priced smartphones, was the most dedicated push to engage diversification strategies in mobile at a global level. Is this the momentum and strategic direction Microsoft is looking to acquire to support its devices strategy?
Also this week, Western Digital (WD) announced its intention to acquire Virident Systems Inc for [US] $685 million, as announced by Reuters. The strategic move here is in-step with the head-to-head race for the SSD server market with Seagate. Again, a diversification strategy that will both help expand its reach in SSD servers which is needed to off-set the still declining PC market's negative effects on HDD sales. As Reuters deftly points out, this acquisition by WD will likely mean that Fusion-IO may soon be the acquisition interest of Seagate, as the two SSD companies are technology competitors.
Finally, we also saw Koch Industries' purchase of Molex for [US]$7.2 billion. As the Financial Times cited Charles Koch, "the Molex acquisition provided 'a significant new platform for growth." In this case the acquisition is likely to be more of a strong investment rather than an acquisition of capability to enhance a core competency, unlike the other M&As mentioned above. The acquisition of Molex, a leader in the manufacturing of electrical and fiber-optic systems and electrical connectors for a variety of sectors, shouldn't go unnoticed simply because it is different in nature than the others. Rather, the move to acquire such a significant sector leader for investment purposes is a strong sign that growth expectations are warranted.
What do these indicators tell us?
Certainly the clear importance of strategic diversification to place components into end-devices with momentum while targeting the positive markets is always at the core of solid business modus operandi. This is no exception.
So why care now? The increase in recent M&A activity occurring at this point in the year does lend increased credence to the position that 2014 will bring positive economic growth for the semiconductor and electronics industry. The increased importance on the coupling of devices with component technological advances is also solidly apparent. The intertwining of use cases for devices with attention to global market placement is evident as well. Having turnkey solutions is not only the domain of supply chain partners, but the device and component manufacturers are looking at their supply chains and partners and seeing where opportunities for strengthening competencies can be found and are putting significant financial bets on those directions now.
To see this much activity is interesting and lends more positive considerations as to how the fourth quarter (4Q13) may shape up and certainly that there are a number of strong players with solid bets on an improved 2014.