Slowing growth to spur analog semiconductor deals
SAN FRANCISCO (Reuters) - Analog chip makers, faced with slowing industry growth and looking to put their piles of cash to use, are likely to spur deal-making in coming months.
The pace of deal-making among analog semiconductor companies had lagged behind the overall technology sector because of strong growth opportunities within the industry.
The analog semiconductor industry grew at about 25 percent annually from the mid-1990s until about five years ago, driven by exponentially increasing demand for these chips from industries as far-ranging as housing and communications.
Analog chips receive continuous signals and are used in products that involve sound waves or pressure, which cannot be broken into ones and zeros -- the stuff of digital signals. Cell phones, computers, planes, cars and radios all use analog chips.
But the industry is now maturing, with the rate of growth dropping to about 10 percent annually. Analysts expect that rate to decline slightly in the next few years.
"Growth isn't as explosive anymore," said Wedbush Morgan analyst Patrick Wang. "The industry is ripe for consolidation."
Analog chip makers are also smarting from the economic downturn, which has shrunk demand for handsets, consumer electronics and other products that use analog components. Last month, Texas Instruments Inc (TXN.N), the largest U.S. cell phone chip maker, lowered its first-quarter earnings forecast, citing a weaker market for chips used in high-end phones.
These factors are likely to spur companies that have the cash to look for alliances designed to lead them to new markets and plug holes in their product portfolios, analysts said.
Wang said he expects a handful of acquisitions over the next 12 months, as companies seek to scale up by combining products, cross-promoting them and bundling sales.
HAVE CASH, WILL BUY
Although analysts said consolidation may not be the cure-all for declining industry growth, many see it as inevitable.
"Analog companies are flush with cash," Lehman Brothers analyst Romit Shah said. "Buybacks and dividends are not enough."
Sustainable profits from high-margin products and low capital expenditure have helped pad the wallets of analog companies, analysts said.
Given the current market uncertainty, many cash-rich companies are also likely to prefer to use their money for acquisitions, expecting better returns than from investments in securities. Depressed stock prices of many potential targets make opportunistic buys more attractive.
Traditionally, companies have hesitated to combine proprietary engineering processes, but acquisitions are no longer taboo, Shah said. Continued...
