Semiconductor industry executives are eternal pessimists.
You can't really blame them, given the sine wave cyclicality of the chip world: Booming demand leads to an oversupply of silicon, chipmakers cut back production, demand returns, output is ramped back up and, as always, overshoots demand. Good times are always followed by bad times; that's how its been for the half-century history of the industry.
Maybe it's fairer to say that optimism in the semiconductor industry is short-lived. Take the current bit of levity that has buoyed the industry. The Semiconductor Industry Association this month estimated that after an 11.6% decline in 2009 global sales, to $219.7 billion, revenue for the sector will grow 10.2% in 2010. Chip-manufacturing plants are pumping out silicon at levels nearing full capacity, according to organizations that track those statistics.
These are good signs, compared with the glut of chips that has saddled semi companies for the past year.
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But, as it always has for the industry, this will cause problems. Paul Otellini, who runs the biggest chipmaker in the world, Intel Corp.,
a couple of weeks ago said PC makers that are ramping up production to
meet expected higher demand next year might face component shortages as
the semiconductor industry hurries to increase its output following a
year of cutting back (PC makers, along with cell-phone manufacturers,
account for about 60% of global chip demand).
It's hard to hurry when it takes nine months or even longer for
multibillion-chip fabrication facilities to crank up production volumes.
"The industry is not ready for this yet," Otellini said. "One of the
things I worry about is, will everybody's capacity be there in
sufficient quantities to build it?"
Better too much work than not enough, you would think. Such concerns
aside, with demand on the upswing, the industry has entered a period
when growth is on executives' minds, and bankers who have worked on
recent deals have noticed a distinct change in the mentality of
semiconductor company management teams.
"The psychology has changed in a huge way," says David Creamer, managing director and the head of Jefferies & Co.'s
global semiconductor banking practice. "We are moving from big guys
divesting and rationalizing their assets to a lot of healthy public
companies returning to growth mode."
Most chip companies have sat on the sidelines through the trough of
the downturn. But they are already shedding their wallflower status.
Take Applied Materials Inc., the largest maker of chip-manufacturing equipment. Its last attempt at a major transaction, when it teamed up last year with Francisco Partners LP to buy some assets of Dutch chip equipment maker ASM International NV for as much as $500 million, fell apart a year ago when the financial crisis hit.
The Santa Clara, Calif., company re-entered the fray Nov. 17, announcing it would buy Semitool Inc. for $364 million, which some considered a bargain price in light of the publicly traded target's growth prospects.
Similarly, Camarillo, Calif.-based Semtech Corp., a leading
maker of analog chips used in computers and portable devices, hadn't
acquired anything significant in years. But a day after Applied
Materials announced the Semitool deal, Semtech, founded in 1960, agreed
to buy venture-backed Sierra Monolithics Inc. for $180 million in cash.
Buyers don't want to wait until things get much better -- or worse,
for that matter. For many small to midsized chipmakers, it is becoming
obvious that despite improving conditions, growth is still tough to
find.
"If you're a small company, unless you have a sustainable niche,
it's difficult to project any growth or defend it in the long term,"
says Jag Bolaria, an analyst with semiconductor research firm Linley Group. "Right now is a good time to exit -- while things still look decent."
Sierra Monolithics had considered merging with another privately
held chipmaker in an attempt to bulk up before going public, Creamer
says. But potential suitors began to approach the chipmaker, which was
when Creamer was retained to represent Sierra Monolithics. For the
company's backers -- U.S. Venture Partners, Storm Ventures Inc. and IBM Corp.
-- a $180 million return on a $27 million total investment was simply
too good to pass up in favor of an uncertain prospect in 2010 for an
initial public offering.
"There are a lot of high-quality companies with $50 million to $100
million in revenues that haven't been able to access the public
markets," Creamer says. As long as executives at potentially
acquisitive chip companies don't think too far ahead, this could result
in significantly more M&A. And that's certainly something to be
optimistic about.
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