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Why Covid-19 shouldn't slow M&As in the semiconductor industry

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2020 was supposed to be the semiconductor industry’s year of recovery. 2019 saw semiconductor M&A deals reaching heights that hadn’t been seen since 2016, heralding a 2020 when businesses would work to overcome the challenges facing the semiconductor industry and face a brighter future as a more consolidated, stronger whole.

For reasons that should be apparent, things haven’t gone exactly as planned. Supply chains have been too easily disrupted, business is down in some segments, and the future of pretty much every industry looks quite a bit different from a year ago. The 2020 total market growth of the semiconductor industry is expected to decline by 0.9 percent, as opposed to 12.5 percent growth, according to Gartner. For many organizations, it might seem appropriate to batten down the hatches and weather the storm by playing it safe. That would mean putting off activities such as investing in new product lines or pursuing mergers and acquisitions in order to preserve resources and make it through this strange time intact.

However, playing it safe is exactly what companies should not do. It’s important to remember that after the last recession and the dot-com bubble burst before that, chipmakers as a whole rebounded within a year, according to a PwC analysis. In fact, both foundries and fabless businesses saw a steeper growth curve coming out of these recessions, meaning not only did the industry get through it, but it came out the other side stronger than ever.

It might seem like a bad idea to add more uncertainty to uncertain times, but the companies willing to take risks will come out of this disruptive period as leaders of the pack.

This is especially true when it comes to making semiconductor M&A deals. Mergers and acquisitions are still happening: For example, Nvidia acquired chipmaker Arm for $40 billion from SoftBank in September. The right kind of acquisition or merger made right now could be exactly what you need to future-proof your business. Just remember, a successful deal won’t necessarily look like one you might have made before Covid-19 hit.

Why the right M&A could help your company outlast the pandemic

A company might consider an M&A for a lot of reasons, yet the primary reason for entering into this type of deal during a recession is to stabilize a company and set it up for greater success down the road. The PwC analysis referenced earlier suggested that organizations that enter into M&As during downturns outperform their competitors over the year that follows. It could very well be that the right kind of merger or acquisition right now could transform your company into an industry leader for years to come.

However, not every M&A deal is right for the times we’re in. Huge deals with large amounts of risk, for instance, are as liable to sink you as they are to send you on to greater heights. Instead, now is the time to focus on smaller deals meant to shore up what turned out to be very fragile supply chains or fill in gaps in lines of service. It’s not a coincidence that top-performing companies are the likeliest to pursue these types of deals during recessions.

Many aspects of the future of the semiconductor industry are up in the air right now. But what is certain is that there will be a future, and it will be booming. By regularly seeking out these smaller semiconductor M&A deals, you have a chance to create a strong, healthy organization that’s ready for a post-Covid world.

Three questions to ask when looking at potential M&A deals

You might know you're seeking modestly sized acquisitions to strengthen your business, for example, but what are the qualities you should be looking for right now? Here are three questions you should ask yourself to determine whether a particular merger or acquisition is right for your company at this moment.

1. How will it de-risk core functions?

The future of the semiconductor industry is uncertain. Product schedules might see even more delays, and many go-to-market strategies will likely have to be rethought. Everything from demand forecasts to capital expenditures to M&As could shift in a surprisingly short time. Right now, there is no part of your business model that you should consider completely safe.

In the face of all this uncertainty, a merger needs to be made on a solid foundation. Joining with another company just to grow market share isn’t a good enough reason. Instead, look at how a company can complement your core business. How can it reduce the risk of your existing operations and help you gain a bigger share of the profit pool in specific industry segments? The key is to focus on how a merger or acquisition can make you stronger, rather than just bigger.

2. Where are you missing service lines?

Covid-19 has changed pretty much everyone’s relationship with technology. Educators, business leaders, politicians, and tech entrepreneurs are all experimenting with different methods for navigating our current reality. This reconfiguration will likely have long-lasting impacts on the semiconductor business, increasing demand in areas like servers, cloud usage, and connectivity.

The pandemic is also likely to accelerate 5G’s push into the mainstream, as remote connectivity becomes increasingly important. Right now, manufacturers and suppliers in the semiconductor industry have an opportunity to get on the ground floor of 5G — especially in the automotive and IoT sectors, where it will almost certainly play a bigger and bigger role over the next five years. However, many semiconductor companies do not have the talent or resources ready to develop and execute on strategies in these budding areas.

Now is the time to ask yourself: What skills and resources does your company need in order to act on a vision for the future? Figure out which application and customer segments will see significant change, and then use that information to develop a plan to differentiate yourself coming out of the current crisis. From there, you can figure out who and what you need in order to execute on that plan and whether a particular M&A deal will provide that for you.

3. Will it further stabilize your supply chains?

The supply chain disruption caused by Covid-19 was both unprecedented and unexpected. However, that shouldn’t lead anyone to believe it can’t happen again. The reason even major players like Intel were hit with supply shortages just as demand increased wasn’t that the entire world shut down — it was because specific areas of China shut down.

On the whole, the semiconductor supply chain is much more fragile than it needs to be, thanks to the overreliance of many semiconductor companies in a single geographic area. If all your semiconductor manufacturing is in a specific area of China, what’s to stop a local natural disaster from taking out your entire supply chain again?

Now is the time to rethink your supply networks and diversify your supply chain so you’re not putting all your eggs in one geographical basket. When considering an M&A deal, then, you should assess what the other party will bring to your supply chain. Where are its factories located? With whom does it collaborate? How does it differ from your own supply and manufacturing pipeline? By focusing on how an acquisition can stabilize your supply chain, you can be ready for the next obstacle life throws at you.

It might seem counterintuitive, but this is not the time to play it safe. The organizations that take aggressive steps now will be the ones that come out the other side stronger, leaner, and more financially stable. Don’t wait to pursue M&A deals that will help you develop a more sustainable, forward-thinking company, ready to face whatever life throws at it next.

Utpal Bakshi, global business for the Hi-Tech Vertical, Wipro Limited