Semiconductor dealmaking has shrunk to the lowest levels in nearly three decades.

Mergers and acquisitions targeting North America’s chipmakers totaled 25 deals worth USD 2.5bn in the year to date (30 August), the lowest number since 1996 and the smallest dollar volume since 2009, according to Mergermarket data.

Three factors are causing North America’s dip in chipmaker M&A, according to Michael Hurlston, CEO of Synaptics [NYSE:SYNA], an acquisitive semiconductor company. First, valuations have whipsawed since 2020, meaning executives and board rooms of publicly traded firms have difficulty agreeing on price.  Second, regulatory hurdles – thanks to rising tensions between the US and China – are now higher than before. Third, after a wave of consolidation in the second half of the 2010s coupled with a lack of venture investment in startups, fewer targets are now left.

Valuation gap

The first inhibiting factor is temporary. Semiconductor stocks surged in 2020 and 2021 on the back of a supply shortage. Valuations then plunged in 2022 after semiconductor firms had amassed vast inventories by over-ordering during the shortage, which negatively impacted financials as they worked through stockpiles. Only some have recovered, chief among them Nvidia [NASDAQ: NVDA], whose graphics chips are best suited to artificial intelligence (AI) applications. Its shares have tripled this year after ChatGPT’s launch last December spawned a frenzy for generational AI.

Synaptics is more representative of the rank and file: In 2022, its shares surged to USD 300 and had a forward multiple of 22x EBITDA. Today, it trades at roughly USD 90 and has a forward multiple of 8x. “If someone comes in offering USD 150 against USD 90, which looks fair, I would say ‘no, my stock is worth USD 300’,” said Hurlston.

Regulatory roughhousing 

While seller expectations will align with valuations at some point to trigger some dealmaking again, the other two inhibiting factors are more structural and harder to shift.

The regulatory process for large public-to-public transactions has become extremely difficult, noted Hurlston. Because US semiconductor companies have substantial revenue in China – accounting for 36% of their sales –  almost every transaction requires approval from China’s State Administration for Market Regulation (SAMR). The ratcheting tit-for-tat tensions between Washington and Beijing has also made things difficult, especially after the US imposed an export ban on advanced semiconductors last October. The SAMR process can drag the merging companies through an 18-month-long limbo, noted Hurlston. Those delays have caused deals to unravel. Earlier this month, Intel [NASDAQ:INTC] pulled the plug on its February 2022 deal for Israel-based Tower Semiconductor [NASDAQ:TSEM] citing a lack of approval from China’s regulators. “It’s a very time consuming and difficult process and that’s causing some concern,” said Hurlston.

For years, semiconductor M&A in the US dwarfed activity in China. By number of deals, China overtook the US in 2014 and their trajectories have continued to diverge. Buoyed by Beijing’s USD 50bn-plus state investment fund for chipmakers, dealmaking volume in China’s semiconductor industry also has eclipsed the US since 2021 onwards.

Shrinking target

Fewer targets also will blunt activity long-term. Shrinking venture capital interest in semiconductors has been an issue years in the making, as investors prefer software and biotech over hardware, which typically requires more capital over longer investment cycles, said Hurlston. Data from Crunchbase, which tracks venture funding, shows funding for US-based semiconductor startups is at the slowest pace in years, even as interest in AI heats up.

“We’re not seeing a lot of interesting carveouts or interesting new startups with market traction,” said Hurlston. The shortage of targets is a global issue, not specific to the US, he adds. Indeed, apart from China, semiconductor M&A has dropped worldwide.

Instead of buying other chipmakers, North America’s semiconductor firms are extending into software, chief among them being Broadcom’s [NASDAQ:AVGO] purchase of VMware [NYSE:VMW] in May 2022. Nvidia, for its part, has made some small acquisitions or fundings – mostly of software or AI companies – since an attempt to acquire Softbank’s Arm Holdings was called off last year after regulators had blocked it. Nvidia has instead been in talks to become an anchor investor in Arm’s upcoming Nasdaq IPO.

Analytics by Izaz Ansari