After slowing down in 2017, chip M&A activity has been picking up again. And by allowing both past and future overseas profits to be more easily deployed towards financing acquisitions, tax reform could give the trend a fresh boost.
The drivers that have fueled so much consolidation since 2013 are still there: A desire for greater economies of scale (and the cost savings that come with them); the ability to sell major customers on more comprehensive product lines for various markets; and the improved pricing power that comes from selling more products and having fewer rivals.
During a recent interview, Cypress Semiconductor (CY - Get Report) CEO Hassane El-Khoury and CFO Thad Trent suggested that plenty of chip M&A talks were still going on behind the scenes in 2017, but weren't publicized as often as prior talks due to the disappearance of Chinese bidders, owing to political opposition. The pair both predicted 2018 would be an active year for industry M&A.
In late 2017, Marvell (MRVL - Get Report) struck a $6 billion deal to buy Cavium (CAVM) , and Broadcom (AVGO - Get Report) launched an unsolicited bid for Qualcomm (QCOM - Get Report) that's worth $130 billion after factoring Qualcomm's pending $47 billion deal to buy NXP (NXPI - Get Report) (NXP shareholders continue holding out for a higher deal price). And more recently, Microsemi (MSCC) was reported to be exploring its options after receiving a buyout offer from an unnamed suitor.
There was also a CNBC report on Monday that Renesas is in talks to buy Maxim Integrated (MXIM - Get Report) that sent shares of Maxim sharply higher. However, Renesas denied the report, sending Maxim shares back down again. It's possible that talks were previously held between the companies, but later broke down -- Maxim is still trading a few points above where it did before CNBC's report emerged.
In November, I listed five chipmakers that could be targeted as industry consolidation continues -- Xilinx (XLNX - Get Report) , Qorvo (QRVO - Get Report) , Cypress, Mellanox (MLNX - Get Report) and Microsemi (MSCC) . Here are a few others that could draw interest from a larger peer:
MACOM Technology ($2 billion market cap) and Inphi ($1.3 billion)
MACOM (MTSI - Get Report) supplies a variety of analog chips (lasers, amplifiers, diodes, RF chips, etc.) used in telecom and data center networks, while Inphi (IPHI - Get Report) supplies some analog parts for telecom and data center clients, as well as transceiver modules and digital signal processors (DSPs).
Much like those of many optical component firms, shares of both companies having been pummeled due to slowing Chinese telecom capex. MACOM trades for just 12 times its 2019 (ends in Sep. 2019) analyst EPS consensus, while Inphi only trades for only 13 times its 2019 EPS consensus. But data center demand, fueled by strong capex and growing adoption of 100-gig and higher optical transmission speeds, is healthier.
One or both of the companies could draw interest from a suitor wanting to grow its cloud data center exposure and willing to bet that telecom demand will eventually rebound. Particularly given their strong margin profiles.
Integrated Device Technology ($4 billion market cap)
IDT (IDTI) might be best-known for its wireless charging ICs, which can be found in many high-volume Android phones (including Samsung's flagships) and charging accessories. But its product line also includes a number of specialized timing, interface, RF and sensor chips going into hardware such as servers, cars, mobile base stations, Ethernet switches and IoT devices.
Shares are getting hammered after IDT slightly beat December quarter estimates but declined to hike its fiscal 2018 (ends in March) sales guidance. They now go for 17 times their fiscal 2019 (ends in March 2019) EPS consensus. The company's healthy cloud exposure -- data center chip sales rose 18% sequentially last quarter, and were 44% of total revenue -- together with its wireless charging, IoT and auto opportunities, could draw interest. All the moreso if a suitor bets IDT's pressured mobile infrastructure sales will pick up as 5G rollouts commence.
ON Semiconductor ($10.5 billion market cap)
ON's (ON - Get Report) size limits the number of potential buyers. But a larger chipmaker such as Texas Instruments (TXN - Get Report) , STMicroelectronics (STM - Get Report) or Skyworks (SWKS - Get Report) could give it a look.
ON's strong exposure to an auto chip market (30% of Q3 sales) seeing healthy growth is a key selling point, particularly given how ON's camera image sensors and power management chips position it within this market. The company also has healthy exposure to an industrial chip market seeing slow but steady growth, and is doing brisk business selling chips for USB Type-C interfaces to smartphone OEMs. Shares trade for 14 times their 2019 EPS consensus.
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Jim Cramer and the AAP team hold positions in Broadcom and NXP Semiconductors for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AVGO or NXPI? Learn more now.
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