Companies in the global high tech industries are competing to increase market presence while continuing to face challenges posed by slim operating margins, high capital expenditure, shortening product life-cycle and managing a global supply chain. Currently high-tech manufacturers are dealing with these difficulties by developing new partnerships and acquiring new capabilities through mergers and acquisitions.
Since 2013 mega-mergers in the semiconductor industry have been driven by the development of new technologies like the Internet of Things (IoT) and huge data centers which require more and more advanced components.
Developing a leading-edge chip can cost upwards of US$100 million which is a big investment even for big companies. As a result, in order to maintain advantage in the market place, more and more companies are turning to merger and acquisition (M&A) of established technology as a way to enable new classes of products that meet customer needs in the data center and IoT market segments, while streamlining costs.
As an example, Intel joining with Altera is expected to strengthen Intel’s profitable business of supplying server chips used in data centers. The shift from personal computer to smart mobile devices has increased the need for high-end Intel chips to process ever increasing amounts of data.
Avago built its business units focused on big data center with three deals: LSI Inc. in 2013, PLX Technology in 2014 and Emulex in May of this year.
Another factor driving the increase in mergers and acquisitions is that many investors in the technology sectors have realized profit through M&A. High stock prices after each of Avago’s acquisitions rewarded their investors handsomely.
Ultimately M&A’s are usually negotiated with an eye toward optimizing operational costs and increasing research and development (R&D) effectiveness and efficiency. Sometimes, as with Intel and Altera, the merger is expected to help streamline an existing operation since Intel already produces Altera’s FPGA devices.
The fast-paced global high-tech industry has distinct and complex challenges. As companies strive to gain and maintain competitive differentiation by adopting new approaches it stands to reason that one of those approaches is M&A. More mergers are expected which will increase impacts to the supply chain in positive and negative ways. For example: fewer suppliers: OEMs and ODMs – instead of 6 suppliers, you only have three; change of part number; shorter line card requiring distributors to update their line card; and obsolescence and new products to name a few.