After multiple attempts to acquire Lattice failed, the door to overseas M&A for Chinese semiconductor companies may be officially closed

Source: This article was translated from Semiwiki by Dian Ji, thank you.

Recently, after an eight-month review, the Trump administration formally rejected a Chinese private equity fund's acquisition of Lattice Semiconductor on the grounds of national security. SemiWiki, a professional forum for the semiconductor industry, subsequently published an analytical article, interpreting the impact of this incident on the current trend of mergers and acquisitions in the semiconductor industry. Semiconductor Industry Watch compiled and introduced the article, but the views in this article do not represent the views of Semiconductor Industry Watch. In addition, we also attached an official announcement issued by the White House Press Secretary's Office at the end of the article.

Although the rejection of the Lattice acquisition deal was expected, the impact of this incident on the chip industry and further M&A integration cannot be underestimated. Stopping China removes a "catalyst" in the market that can both increase value and scare potential acquisition targets or abandoned companies. The difficulty of cross-border transactions is obvious, and now even small transactions with China are likely to be put under the microscope.

Huaxin's acquisition of Xcerra should be relatively safe because of its small scale and lack of key technologies. Just like the previous Mattson acquisition, the United States only allows China to acquire second- and third-tier small chip companies that do not have unique technologies or key market positions.

Will this slow down China's chip ambitions?

Will this further slow down M&A integration?

Will this have a negative impact on future device sales to China?

The rejection of the Lattice deal was entirely expected, and it means that the United States has successfully built a virtual wall to prevent China from getting involved in American high-tech. China may no longer be able to participate in major transactions under the obstruction of the Committee on Foreign Investment in the United States (CFIUS). The Aixtron acquisition case was a precursor, with clear signs that the United States, through CFIUS, blocked China's acquisition of the German company (despite its American technology assets).

We didn’t see similar behavior from the U.S. government when Japan, Taiwan, and South Korea entered the chip business because they were clearly considered friendly competitors.

The net that caught Lattice was designed for big fish, and small fish can still pass through, which means that small mergers and acquisitions can still pass CFIUS review. The Mattson transaction was successfully completed because the company was just a small third-tier company and had no unique technology. We believe that the Xcerra transaction can pass safely because it is smaller than Teradyne and Advantest, and is also an insignificant third-tier small company in the market, and is not seen as a promoter of Moore's Law.

But the problem is that small fish can't help China achieve its goals quickly. This size and type of acquisition can neither bring technology nor market share to China. If China can only buy second- and third-tier small companies, China will never catch up with the first-class level... But this is the purpose of the United States: to let China buy those companies that the big American companies buy out.

The semiconductor industry is clearly concerned about China's ambitions, and China has invested hundreds of billions of dollars to make these ambitions a reality. The number of Chinese fab projects seems to be almost greater than the rest of the world combined. We are obviously very skeptical about how much of this is real and how much is exaggerated.

We thought, you can easily announce a lot of Chinese projects but not take action. Even if those are built, how much impact will they have?

SMIC has high ambitions to beat TSMC in China. Many Taiwanese engineers left the island to work for SMIC, giving the company access to a lot of talent. But it turns out that SMIC won't go far. The US government restricted tool sales to China, and the talent was not integrated into a team that could keep up with the cutting edge. SMIC is now a pretty good chip foundry, but it is not yet a world-class player as it wants to be. It does not yet have enough technical assets and human resources to become a leader in the chip field in its respective country like Intel, Samsung, TSMC and Toshiba. Just having money does not guarantee joining the club of these top companies...

We don't think any US tool company's future plans are that dependent on China, so this probably won't be a big disappointment. We will see some Chinese investment shift to local suppliers, such as AMEC, and some to South Korea (such as SEMES) and Japan (such as Tel & Hitachi); but it is impossible to reach the leading edge using only tools from these companies. China still faces difficulties in purchasing tools from US companies, just like SMIC is now.

At a recent meeting of industry executives, they pointed out that in terms of technology scale, making solar panels might be like "1", while making 10nm chips is like "10", LEDs are "2", and OLEDs are probably around "8". We agree. Technology scale affects economics. You can invest $25 million to $50 million to build a factory to make solar panels or LEDs; but we all know that the cost of building a chip factory is astronomical. OLED development is not that simple, not only because Samsung has succeeded, but also because LG has been left behind. Apple found itself forced to invest heavily in a single source of high-quality OLEDs to produce the iPhone X, and that source (Samsung) is its strongest competitor in the mobile phone market.

In short, while concerns about China are legitimate, we don’t need to fear a Chinese entry into the semiconductor or OLED markets in the same way they did in solar/LED. While the US has been squeezed out of the solar market, and companies like Veeco have been hit hard in LED, we don’t see such a threat in the chip space. While China’s AMEC is making strides to challenge Veeco in MOCVD, it’s still a long way from Lam’s high-aspect-ratio etch tools for 3D NAND (at least for now…)

If China no longer has a reasonable expectation to invest in U.S. chip assets, it eliminates the irrational purchasing power of Chinese buyers to overpay and drive up valuations. Lattice is a clear example, as China intends to acquire the company at nearly 2 times its market value, which is not a normal typical acquisition premium at all. This also eliminates the fear and pressure of American companies, so that they no longer need to quickly integrate or cling to the thighs of the "White Knight" to escape China's control. Similarly, because the overhead threat has been eliminated, there is no need to rush M&A integration transactions.

The plot of the Toshiba semiconductor acquisition is getting more and more complicated, as Apple and Dell become new characters in this polyamorous Italian opera. I have long lost track of who is on whose side and who loves whom; what I am paying attention to is that the investment amount has continued to rise to the current $19 billion and is still going. This looks very likely to be far from over, but it is starting to get interesting.

We wondered how much of a premium Toshiba's chip business was being paid, and whether it exceeded the depreciation of its fabs and equipment. Our calculations suggest that the premium is very high. At last count, you could build three large, state-of-the-art NAND fabs for $19 billion -- and Toshiba doesn't have three large, state-of-the-art NAND fabs.

This goes back to the value of technology/IP/knowledge, which is the point, China wants these, but it is difficult to get them.

We are also surprised to find that just a few years ago, there were no takers for assets for sale in the memory space. Anyone remember Inotera and Elpedia? Micron did a great job getting a lot of assets at a low price at the bottom of the cycle; and now Toshiba is selling at the top of the cycle (are these buyers really as smart as they think they are???)

Investors in Abu Dhabi must be standing by and cheering, because their Global Foundries shares are apparently worth a lot more than before.

We think Toshiba is more of an exceptional case than a typical case of current M&A integration needs. First, it is a carve-out sale because Toshiba is being forced to liquidate; second, the memory market is clearly very frenetic.

It’s clear that in the chip equipment space, smaller is better. After AMAT/TEL and KLAM, everyone is scared. We feel like there are more companies in the space talking about M&A consolidation now, but the pickings are very narrow. You can’t get customer buy-in on a large deal (think Intel), and a small deal doesn’t make enough of a difference. Unfortunately, the industry is like a barbell with a few very large companies and some very small companies, and not many potential acquisition targets of the right size. Varian was the last good deal on the equipment side, and MKS’s acquisition of Newport was one of the last good deals on the supplier side.

The semiconductor industry is likely to continue to see a large number of small deals driven by strategic technology rather than financial considerations. One example is Lam’s recent acquisition of Coventor. Coventor’s $25 million in revenue is a fraction of Lam’s, but Lam is looking at very critical technologies that can help Lam’s core etch and deposition business sell more products and improve processes, and the value generated will likely be many times that revenue. ASML clearly overpaid when it acquired Hermes, but Hermes is strategically important to ASML’s large EUV business.

Given the slowdown in M&A integration and China being excluded from the market, we see little reason to pay a higher premium to potential target companies. Valuations are already high, and we should not see too much premium in M&A. Veeco's acquisition of UTEK is an example of this phenomenon, where the premium was low because UTEK's valuation was already saturated and its performance was not good.

The low hanging fruit is gone, and getting good deals past government and customer scrutiny is harder. Stock prices are falling further. While we do expect M&A to continue, we think the pace will slow, premiums will be low, and we won’t choose stocks based on our expectations of activity.

The following is the official announcement from the White House Press Secretary's Office:

Order Regarding the Proposed Acquisition of Lattice Semiconductor Corporation by China Venture Capital Fund Limited

By virtue of the authority vested in me by the Constitution and the laws of the United States of America, including section 721 of the Defense Production Act of 1950, as amended (section 721), 50 U.S.C. 4565, it is hereby ordered as follows:

Section 1. Findings. (a) There is credible evidence that (1) Canyon Bridge Merger Sub, Inc., a corporation organized under the laws of the State of Delaware (Merger Sub); (2) Merger Sub’s parent, Canyon Bridge Acquisition Company, Inc., a corporation organized under the laws of the State of Delaware (Acquisition Company), Canyon Bridge Capital Investment Limited, an entity organized under the laws of the Cayman Islands (Capital Investment), and Canyon Bridge Fund I, LP (CBFI), a limited partnership organized under the laws of the State of Delaware; and (3) CBFI’s limited partner, Yitai Capital Limited, a corporation organized under the laws of Hong Kong (Yitai), and Yitai’s parent, China Venture Capital Fund, Ltd., a corporation organized under the laws of the People’s Republic of China (CVCF, together with Merger Sub, Acquisition Company, Capital Investment, CBFI, and Yitai, the Acquisition Party), through executive control of Lattice Semiconductor Corporation, a corporation organized under the laws of the State of Delaware (Lattice), may take actions that threaten the security of the United States; and

(b) In my judgment, the provisions of law other than section 721 and the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) do not provide me with full and appropriate authority to protect the national security with respect to this matter.

SECTION 2. ORDERS AND AUTHORIZED ACTIONS. Based on the findings set forth in section 1 of this order, and with reference to the factors set forth in section 721(f) of the Defense Production Act of 1950, and pursuant to the authority vested in me by applicable law, including section 721, as appropriate, I hereby order as follows:

(a) The proposed acquisition of Lattice by Acquirer (the Proposed Transaction) and any substantially equivalent transaction are prohibited, whether effected directly or indirectly by Acquirer, whether through Acquirer’s shareholders or their direct, intermediate, or ultimate foreign beneficial owners, or through Acquirer’s affiliates.

(b) Acquirer and Lattice shall take all necessary steps to fully and permanently abandon the proposed transaction within 30 days of the date of this order, unless such date is extended by CFIUS, which may require a period not exceeding 90 days, subject to conditions. Upon completion of all necessary steps to terminate the proposed transaction, Acquirer and Lattice shall promptly certify in writing to CFIUS that the termination process has been completed in accordance with this order and that all necessary steps to fully and permanently abandon the proposed transaction have been completed.

(c) Beginning on the date of this order and until Acquirer and Lattice provide CFIUS with a certification of the termination of the proposed transaction, pursuant to subsection (b) of this section, Acquirer and Lattice shall certify to CFIUS on a weekly basis that they are complying with this order and that the certification shall include a description of all work done to permanently abandon the proposed transaction and a timetable for the remaining actions expected to be necessary to fully effectuate the abandonment.

(d) Any transaction or other means for the purpose or effect of evading or circumventing this order is prohibited.

(e) The Attorney General shall have the authority to take any steps necessary to enforce this order.

SECTION 3. SAVINGS. I hereby reserve the power to issue such further orders with respect to the Acquisition Company and Lattice as I deem necessary to protect the national security of the United States.

SECTION 4. PUBLICATION AND TRANSMITTAL. (a) This order shall be published in the Federal Register.

(b) I hereby direct the Secretary of the Treasury to transmit a copy of this order to each of the parties to the proposed transaction described in section 1 of this order.

Donald J. Trump

White House

September 13, 2017

Original link:

https://www.semiwiki.com/forum/content/7016-what-does-lattice-rejection-mean-chip-m.html

https://www.whitehouse.gov/the-press-office/2017/09/13/order-regarding-proposed-acquisition-lattice-semiconductor-corporation

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