NEW YORK (The Deal) -- While Atmel's (ATML) $4.4 billion acquisition by Dialog Semiconductor punctuates the consolidating semiconductor industry, chip-equipment suppliers could be next on the M&A hit list, with Rudolph Technologies (RTEC) the odds-on favorite to be the first to be bought by a strategic buyer, industry observers say.
Dialog Semiconductor announced Sunday that it has agreed to buy Atmel in the latest megadeal to take place in the semiconductor space. For the San Jose, Calif., target, the transaction equates to $10.42 per share, or about a 43% premium to Sept. 17 closing price of $7.27.
"Atmel was a natural one," said Ted Moreau, managing director of Barrington Research Associates.
He does expect more M&A in the microcontroller segment. Microcontrollers refer to integrated circuits, or chips, with embedded microcomputer capabilities.
But Moreau believes the semiconductor equipment space -- containing those companies that serve chipmakers -- may be the next place where there's extensive consolidation, given the deep well of small- and mid-sized M&A targets suffering from a lack of scale.
"They appear to be stuck," he noted. "They're good at what they do, but can they ever get enough scale to become meaningful?"
Rudolph Technologies fits the bill, Moreau said, pointing out that the provider of inspection and packaging software and systems for chipmakers could pursue a merger with an equal and add enough bulk to eventually become an appealing target for market giants such as Lam Research (LRCX - Get Report) .
Fremont, Calif.-based Lam Research supplies equipment and services to the semiconductor industry.
While Moreau declined to name potential merger partners for Rudolph, he did explain that the Flanders, N.J.-based company is in a good position because of its exposure to the packaging business.
"They're clearly gaining market share," he added. "They're in a driver's seat, if you will."
He went on to note that Rudolph would likely be willing to sell at $15 per share, or about $475 million based on its 31.62 million outstanding shares. Shares of Rudolph finished at $12.86 Monday, up 1.6% and giving the company a $406.6 million market capitalization. By comparison, Lam Research has a nearly $11 billion market cap.
Dealmaking involving chipmakers have been particularly fluid this year, making it an historic year so far. There have been more than $104.7 billion worth of deals announced in the semiconductor space globally so far this year, compared to about $46.3 billion in 2014 and $35.5 billion in 2013, according to data from Dealogic.
The largest transactions include Avago Technologies (AVGO - Get Report) $36.6 billion pending acquisition of Broadcom (BRCM) and NXP Semiconductors NV's (NXPI - Get Report) $17.6 billion purchase of Freescale Semiconductor.
The Deal reported in March that Atmel could emerge as a potential acquisition target as chipmakers were anticipating a wave of consolidation. Sources said at the time the chipmaker had positioned itself well by exiting businesses that it was having trouble with and whose management teams were open to a sales process.
The semiconductor company joined The Deal's Watch List of potential activist targets in May when it was identified as a "perpetual favorite" in the activist investor community.
In August, Atmel revealed that it had started a strategic review and that CEO Steven Laub extended his retirement date to facilitate the completion of the process. Industry sources explained that Atmel would be worth about $10 per share in a transaction, or about $4.2 billion based on the target's outstanding shares.
"The microcontroller space has been consolidating as of late," said Suji Desilva, an analyst with Topeka Capital Markets. "It was a fragmented market and some of the combinations are helping."
He noted that the Atmel transaction involves a strategic acquirer entering a market, not one adding to the business it already had there.
"It indicates that this is an important segment for various companies," Desilva said of Dialog's purchase.
Atmel has benefited from its early focus on Internet of Things, also known as IoT, that refers to the idea of connecting physical objects to the Internet and a strong distribution channel, Desilva added.
Desilva said Monday that Austin, Texas-based Silicon remains an appealing M&A candidate and added that it is similar to Atmel in that it has a distribution channel and microcontroller-focused portfolio of assets behind IoT, connectivity and sensors.
Wedbush Securities analyst Betsy Van Hees wrote in a Monday note that the proposed offer by Dialog represents the best possible outcome for Atmel.
"Since Atmel has essentially been for sale since early May, when the CEO announced his plans to retire, and the only other supposed suitor is China Electronics (CEC) with their very lowball offer (in our opinion) of $8.50 per share as reported by Bloomberg on Sept. 16, we don't expect a competitive bid for Atmel to surface," she wrote.
Shares of Atmel closed at $8.19 Monday, up nearly 13% and giving the target a $3.43 billion market capitalization. Shares of Dialog plummeted about 19% Monday to finish at €36.75, giving the buyer a €2.78 billion market cap.
Officials with Atmel, Dialog, Rudolph Technologies and Lam Research didn't respond to requests for comment Monday.