A brief discussion on the M&A investment in the domestic IC design industry based on the development of Broadcom in the United States

Source: The content comes from "Junjun's Investment and Mergers and Acquisitions", thank you.

Back on November 6, 2017, Broadcom, a chip giant with a market value of $100 billion, formally proposed an acquisition agreement for Qualcomm at $70 per share . The price also means that the total amount of the acquisition will be as high as $130 billion. If the deal is completed, it will become the largest merger and acquisition in the history of technology. But in the end, it was rejected by Trump on the grounds of national security.

Looking at the growth path of chip giant Broadcom, it has continuously strengthened and expanded its product lines through mergers and acquisitions to create a multi-faceted leader. This astonishing acquisition is a common method for it to grow and develop. As a giant and benchmark in the IC industry, Broadcom is worth learning from.

From a semiconductor product business unit under HP more than 50 years ago, Broadcom (formerly Avago) has grown all the way to an industry giant with a market value of US$100 billion today. It is also a classic example of mergers and acquisitions carried out by private equity giants such as KKR and Silver Lake with their own expertise.

In 1999, HP spun off its chip manufacturing, electronic measurement and analytical instrumentation businesses to form Agilent Technologies. In 2005, KKR and Silver Lake Partners acquired Agilent Technologies' semiconductor division for $2.66 billion, making it an independent company, Avago Technologies.

In 2008, Avago Technologies acquired Nemicon to enrich its motion control product line, and in October of the same year, it acquired Infineon's bulk acoustic wave business, giving it a market share of 56% in the BAW filter field.

In 2009, Avago Technologies was listed on NASDAQ in the United States;

In April 2013, Avago acquired CyOptics, strengthening its leadership in the field of optical fiber products. In the same year, it acquired Javelin Semiconductor to strengthen its presence in the field of wireless communications. In December 2013, Avago announced the acquisition of LSI, a long-established chip supplier in the United States, for $6.6 billion. This acquisition expanded its enterprise storage product line and planned to target business areas such as data center IP and mobile data traffic.

In 2014, Avago spent $300 million to acquire PLX Technology, strengthening its storage and other areas;

In March 2015, the company announced the acquisition of Emulex, a network IC company, for $609 million, further strengthening its enterprise storage business. In May 2015 , Avago announced the acquisition of the semiconductor company Broadcom for $37 billion, forming the current Broadcom company - New Broadcom, becoming the world's fifth largest semiconductor company, ranking after Intel, Samsung, TSMC and Qualcomm.

In November 2017, Broadcom announced the completion of its acquisition of network equipment manufacturer Brocade for $5.9 billion, making Broadcom a dominant player in the Fibre Channel switch market. In the same year, the company announced an acquisition of mobile chip giant Qualcomm for over $100 billion, but it was rejected.

In November 2018, the company completed the acquisition of US business software company CA Technologies for $19 billion, thereby diversifying its technology services beyond the semiconductor field. The company's management has clearly stated that it will continue to acquire and merge in the future.

Referring to Broadcom’s development history and the seemingly “dazzling” mergers and acquisitions mentioned above, it can provide inspiration and reference for domestic communications and chip companies.

1. People - A professional management team (boss) is crucial. With the firm support of the private equity fund's controlling shareholder, CEO Hock Tan has demonstrated strong capital allocation capabilities and a performance-oriented development culture. He examines cash flow, profit margins, and ROE from a professional perspective. (The author believes that the team or boss is always the most important factor in the development of an enterprise. Mergers and acquisitions are also about people. Hock Tan is actually a very good professional manager recruited by a private equity fund. He has received good enough incentives and works passionately. He should be what Buffett calls an "outsider" in the semiconductor industry! )

2. The strategy is clear and in line with the development trend of the industry. Efficiently and continuously carry out horizontal and vertical mergers and acquisitions around the four major business segments. Through repeated mergers, spin-offs, and sales, the company consolidates its main business, expands new product lines, continuously enhances its core competitiveness, and gathers scale. (This is different from many mergers and acquisitions in the current A-share market that are carried out to piece together net profits and increase market value, or are simply for cross-market arbitrage. It is not easy to do the right thing within the circle of competence .)

3. Private equity funds Silver Lake Capital and KKR played an important role at important development nodes. In a sense, Broadcom is more of an M&A private equity company than a semiconductor company. A strong board of directors and good corporate governance played an important role in strategy formulation, major investment and M&A, performance incentives, etc. (Compared with the bustling "M&A funds" in China, the big PE players in mature markets are indeed our predecessors in value creation and value realization.)

4. If you want to enter the mainstream market and become a big player, you must have scale, otherwise, you will be hard to escape mergers and acquisitions. The IC design industry is actually very cruel. If you want to enter the "upper class" and make a lot of money, you must continue to accumulate strength and scale through various means.

In fact, other giants such as TI, ST, etc. also have a history of mergers and acquisitions.

The foreign IC design industry has been developed for decades and is highly mature, and has basically formed a monopoly in major fields. Overall, the domestic industry is still in the starting or catching-up stage. Merging and acquiring leading foreign companies (mainly the United States, Germany, Japan, etc.) is the best way to narrow the gap as soon as possible. However, due to ideological and other reasons, this path is already difficult to take. ( But it should still be possible in some relatively niche and non-mainstream fields. In addition, the businesses that some giants have divested for various reasons can also be taken seriously. Some "abandoned children" may be treasures for us. )

Next, apart from a few "overseas shopping", more companies should focus on strengthening and expanding their product lines in China around their own circle of competence, improving their R&D and service capabilities , and using their strength and scale to compete with a number of smaller domestic competitors and larger foreign competitors.

1. Carry out mergers and acquisitions with leading listed companies in related fields as the main body

This is a more suitable model at present. With the help of the leading listed companies in the industry, the capital strength (stock issuance), it is recommended to combine the leveraged financing and investment and investment banking capabilities of private equity (mergers and acquisitions) funds to carry out mergers and acquisitions and integration of high-quality targets with complementary and synergistic effects in the industry, which will enhance the value of listed companies.

In fact, we have seen that companies such as GigaDevice (which also has an investment and M&A platform and is planning to acquire fingerprint recognition IC company Silead), Shengbang Micro (planning to acquire Yutai), and Silergy (which has already carried out multiple M&A) are already making great efforts to advance. Of course, there is also the big move of Will Semiconductor, which mainly engages in distribution, to acquire the declining CIS aristocrat, OmniVision (and also took over Sipico, a domestic low-end CIS company) . The process was really ups and downs, and it depends on whether it can be played out next.

In addition to the IC design field, mergers and acquisitions investments in the fields of pan-semiconductor (including OLED, etc.) materials (and some equipment, don’t always focus on the photolithography machine, wishful thinking is difficult to achieve ), such as wet electronic chemicals, silicon materials, luminescence, optical films, etc., have dividends.

2. The development path of M&A of listed or non-listed companies controlled by private equity funds

It can be called a Broadcom-like model! Or it can be called the 3G Capital (mainly focused on the food and beverage field) model in the IC field, except that the GP has come to the fore. At the current stage, I personally think it is an innovative investment and M&A strategy. Especially when the domestic industrial development is in its initial stage, some sub-sectors show low market concentration, low-end products, and low corporate output value (such as in the fields of analog ICs and sensors), and objectively need appropriate industrial integration. PE funds can take the initiative to strategically allocate capital and resources, build a high-performance industrial operation platform, and thus create greater value.

Deduction - For example , if the power management IC can gain a foothold in the entry-level consumer electronics field based on certain technical R&D capabilities and scale, it can further expand application scenarios such as mid-to-high-end industrial/automotive markets, expand product lines such as signal chains and even common power semiconductors in a timely manner, strive to create an IDM industry ecosystem, and efficiently and continuously promote the development strategy of large analog ICs to enhance the competitiveness of "import substitution" and even upgrading innovation. Of course, the sturdy and big ticket play of holding up Gundam in the storage field of tens of billions, like Mr. Zhao of Tsinghua Unigroup, is another matter.

Players. Currently, Wu Yuefeng, who has a lot of "cards" in his hand and a deep background in the semiconductor industry, personally believes that there are many options and he can do more in terms of value creation in the industry. Walden International, a veteran semiconductor investment institution, is also actively trying cross-border M&A investments with its partners, taking advantage of its cross-market investment advantages.

Based on the author's observation of the industry, combined with investment and M&A practices, I believe that the five fields of analog IC, power semiconductor, sensor MEMS, MCU, and RF/wireless can be treated as the focus. The market capacity is huge, the big brother is taking the lead and the younger brothers can also try their hand. It is not as high-end as CPU/storage, and we can give full play to our advantages such as being close to the largest IC market and the huge engineer bonus, and it is very likely to make a big breakthrough.

1. Analog chips

Analog chips are the fastest growing segment in the IC industry and are also a “big pond” with a relatively stable cycle.

In 2017, the global analog chip market was worth $52.7 billion, and it is estimated that by 2022, the market will reach $74.8 billion. In 2017, the domestic analog chip market was worth RMB 200 billion. However, the market is basically monopolized by overseas companies represented by TI and ADI. Shengbang Microelectronics in China had a revenue of RMB 532 million, with a market share of less than 1%.

For example, the power management chip market in China had sales of 74.2 billion yuan in 2017, excluding signal chain products. Because the entry barrier is not high, most of the industry is engaged in price wars in the crowded consumer electronics market, resulting in low gross profit margins. The author initially thought that Shengbang Micro and Silergy, as the domestic "leaders" (still very weak compared to foreign giants), could actually do more and better.

Imagine that a player with a dream (Shengbang Micro, or others?) , in the current power management that needs to be strengthened, can the market share be improved through horizontal mergers and acquisitions - Saiweiwei (just a guess, the same below), expand the scale, and gain the right to speak? In addition, in terms of expanding product lines, can Signal Chain consider acquiring SiRuiPu? Or, using existing customers, channels and R&D capabilities, can it consider acquiring an advantageous MCU team and company? Even, if possible, privatizing Silergy when its stock price is low (listing in Taiwan, there is a chance) to supplement the industrial market, which is not a strategic move that can be considered?

To put it in an extreme way, if TI were to spin off its power management or signal chain division someday, that would be a big piece of cake! The key is, are you ready?

2. Power semiconductors

The power semiconductor market has a large stock volume and large incremental growth, and the competitive landscape is favorable to domestic companies.

According to Yole data, the global power semiconductor market size in 2018 was approximately US$30.2 billion, of which the scale of discrete devices/modules/power ICs were 9.9/4.0/16.3 billion, accounting for 32.7%/13.3%/54.0% respectively. The overall scale is expected to increase to US$34.7 billion in 2022. In 2017, the domestic IGBT market size was 12.1 billion yuan, and it will reach 52.2 billion yuan in 2025, with a compound annual growth rate of 19.9%. The domestic market is mainly monopolized by foreign capital, and local companies account for only about 10% of the market. Fortunately, the competition landscape is relatively fragmented. Except for Infineon and ON Semiconductor, the market share of other manufacturers is not much different, which gives domestic companies room to survive.

The main IGBT field is a complete industrial chain. The IDM model can better respond to customer needs (like most analog IC giants), and has advantages in process docking, cost control and R&D efficiency. For example, Yangjie Technology is currently mainly engaged in power diode rectifier bridge business, with less IGBT business, so it can be said that the foundation is good.

In fact, several IGBT companies have emerged in the primary market, such as Zhongke Junxin, Xi'an Xinpai, etc. Jiaxing Star (module-oriented) is also queuing for IPO. From the perspective of the industrial chain, IDM companies such as Yangjie Technology and Silan Microelectronics may conduct a series of mergers and acquisitions of upstream design companies, including compound semiconductor SiC, GaN, and even module companies. Design companies may invest in and acquire module companies or compound semiconductor companies based on business model considerations to provide better solutions to serve customers.

3. Sensor MEMS

As the most basic sensing device, sensors have a wide range of application scenarios and a huge market space.

The main focus is on MEMS and image/3D sensors. The microelectromechanical (MEMS) market will achieve an average annual compound growth rate of 17.5% between 2018 and 2023, and the market size will reach US$31 billion in 2023. The market size of automotive CMOS image sensors alone will grow rapidly from US$2.2 billion in 2016 to US$7.7 billion in 2022, with an annual compound growth rate of up to 24%.

In the CMOS market, Sony is a giant in the mid-to-high-end market, but domestic companies such as GalaxyCore and Sipix are gradually gaining momentum in the mid-to-low-end market. In terms of MEMS, application scenarios are segmented and fragmented, which provides opportunities for domestic companies. For example, Minxin Micro's microphone products have occupied 50% of the domestic smart speaker market share. In addition, in terms of 3D optics, Orbbec has already cooperated with major manufacturers. Overall, there is still a big gap in the high-end market and applications such as automobiles (demand for cameras, radars, etc. brought by ADAS).

There are tens of thousands of sensor products in the industry. It is difficult to grow by relying on a single "hot-selling" product. Even if Minxinwei has a strong position in the microphone field, in addition to moving further to the high-end, it is also actively expanding new product lines and application scenarios. At the same time, in order to cope with the development trend of miniaturization, integration, and intelligence of sensors, it provides good investment opportunities for mergers and acquisitions and integration in the industry.

For example, Hanwei Technology, relying on its leading advantages in the field of environmental/gas sensing, has acquired a magnetic sensor company, Multidimensional Technology, which has certain strengths in the industrial and home appliance fields? Or, as the leader of MEMS foundry, Nawei Technology, relying on its IDM model, is entirely possible to acquire leading upstream MEMS companies in certain segments, including Mindray Micro in the field of fingerprint recognition, or even Minxin Micro? In addition, some MCU companies may also acquire MEMS companies based on strategic considerations.

4. MCU

MCU, as the core of intelligent control, is an important market that cannot be ignored .

According to statistics, the global MCU market size in 2017 was about 17 billion US dollars, with a wide range of industry applications. The growth rate of MCU in the Chinese market is higher than the average growth rate of the global market. The compound growth rate of the domestic MCU market in the next five years will reach 11.7%, and the market space will exceed 50 billion yuan by 2020. At present, the eight major foreign MCU manufacturers (Renesas, NXP, STMicroelectronics, etc.) occupy about 90% of the market share.

In general, among the more than 100 MCU companies in China, most of them are still focusing on 8-bit MCU, accounting for about 50%. 16/32-bit MCU accounts for about 20% respectively. There are also common problems in the electronics field - the application fields are mostly concentrated in low-end electronic (consumer, instrumentation, etc.) products, and the market for mid-to-high-end electronic (industrial, automotive, etc.) products is still in the hands of foreign giants. Currently, companies with certain competitiveness in technology research and development, product performance, or ecological construction mainly include GigaDevice, Lingdong Micro, etc., as well as Zhongying Electronics, the leader of small home appliance MCU, and Huada Semiconductor MCU Division, which is strong in the industrial control field and has considerable R&D capabilities.

It is expected that, based on the consideration of consolidating and expanding product lines, optimizing product structure and improving product performance, and giving play to the synergy of technology research and development, product types, customer channels and supply chains, related companies in the industry will conduct industrial mergers and acquisitions. For example, taking the authentic MCU listed company GigaDevice (which also has storage business) as an example, the acquisition of Lingdong Micro can supplement its consumer electronics and smart hardware chip product lines and customized products, and can further consolidate its industrial ecological chain (Lingdong Micro itself started as a design service); or, investing in and acquiring Saiteng Micro - its R&D strength is strong, and the LED taillight main control MCU chip has entered the mainstream automotive electronics supply chain, to help GigaDevice quickly enter the high-end industrial/automotive electronics field. Even, it is not ruled out that GigaDevice or Zhongying Electronics will enter the MEMS field through mergers and acquisitions to cope with industry development?

5. FR/RF, wireless

With the advent of 5G, the RF front-end of wireless communications faces a period of opportunity.

In 2017, the global market size of the RF field was about 14.7 billion US dollars, of which filters (55%) and power amplifiers (PA) (34%) were the two types of devices with the highest share. According to Yole statistics, the PA market will grow from 5 billion US dollars in 2017 to 7 billion US dollars in 2023. The overall situation is an oligopoly competition pattern dominated by three IDM companies, Qorvo, Skyworks and Broadcom (Avago), which together account for more than 90% of the market share and are eating big meat. The domestic RF chip players are mainly RDA, lansus, Vanchip, HiSilicon, etc., with a total revenue of less than 2 billion yuan in 2016, which is a fraction of the overseas giants. There is a lot of meat, but it is not easy to eat.

Looking at the RF industry ecosystem, the trend of integration has brought about changes in the business model, evolving towards the dual focus of Filter+PA. Giants are grabbing the market by providing a package of solutions through modular products. This undoubtedly increases the difficulty for domestic companies to participate in market competition.

In response to development trends and market competition, leading filter, power amplifier PA, switch and antenna companies in the RF industry ecosystem are expected to promote M&A investments. In the PA industry chain, GaAs wafer (including epitaxial wafer) providers, design (including IDM) companies, and foundries are likely to make investments to extend the industry chain. For example, foundry Sanan Optoelectronics may participate in or control leading Fabless chip design companies such as Lansus, and leading filter companies may also invest in and acquire high-quality RF chip companies. Ultimately, to better meet customer needs.

The above is my personal understanding of investment and M&A in the key areas of IC investment. M&A is risky and investment should be cautious. If I have time later, I will write something about the field of pan-semiconductor materials (which is the pain point of the current domestic industry). If there are any shortcomings, you are welcome to communicate more! As a private equity fund practitioner, I am also willing to contribute to the development of the domestic pan-semiconductor industry.

Finally, I remembered a sentence that is very important for becoming an outstanding company: "Think big, think long, think deep."

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