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M&A activity could put some charge in a struggling industry that has recently looked more semi than conducting
by Russ Mould
A succession of profit warnings have taken their toll on semiconductor stocks but a fresh round of consolidation could boost the beleaguered sector.
Franco-Italian combine STMicroelectronics and NXP, which was spun out of Philips in 2006, have agreed to merge their cellular chipset activities. STMicro is to pay NXP $1.55 billion and inject a further $350 million directly into the venture in return for an 80% stake in the new entity. This implies a multiple of two times historic sales, well above the one times paid last summer when Infineon acquired LSI Logic’s handset chipset business in a deal worth a maximum of ?367 million.
Value hunters could also be encouraged by Diodes Inc’s £89.1 million bid for Zetex. The all-cash offer represented a 94% premium to the analogue chip expert’s then share price and implies an EV/Sales multiple of around one times for the Oldham firm.
Despite this M&A flurry, a slew of disappointing trading updates have left the industry benchmark, the Philadelphia Semiconductor index (SOX), hovering just about the five-year low of 335 it set in March.
Last week saw Spansion, the world’s leading pure-play flash memory provider, blames slack demand in China for a 7% shortfall in Q1 sales. The American firm derives 10% of sales from Nokia, whose short-term fortunes were first questioned when Texas Instruments cited lower than expected demand for 3G phones in its March profit alert.
Microprocessor expert AMD admitted in early April to weakness across its computing, graphics and consumer electronics segments. Rival Intel’s protestations that its March warning was down to its NAND flash arm are unconvincing, particularly as DSGI subsequently emphasised weak PC demand when it issued its second profit warning recently.
Mobile phones and PCs are the two single largest generators of chip demand. But credit crunched corporates and debt-saddled consumers appear to be cutting back on spending in tech areas, if recent trading updates from the likes of TomTom are any guide.
At least UK chip leaders got their bad news out first, so a lot has been priced in. ARM, for whom Texas Instruments is the single largest royalty-paying customer, tempered 2008 sales growth forecasts in February. CSR’s warning came later that month after market share loss at Nokia. Wolfson saw its shares hit a three-year low in April, with chief executive Dave Shrigley admitting the Scottish firm had lost a key MP3 player design slot with an unnamed major customer.
Adjusting for their net cash piles, both Wolfson and CSR trade at around 0.7 times EV/Sales for 2008, below the multiple offered for Zetex, but their fabless model should render them inherently more profitable.