Kindred spirits: China and the US share similar goals, but different M&A targets in the semiconductor race

Data InsightDealspeak 7 October

Kindred spirits: China and the US share similar goals, but different M&A targets in the semiconductor race

The technology rivalry between the world’s two largest economies is charging ahead, with China and the US dominating global deal-making activity in the semiconductor industry in the first three quarters of 2021, according to Dealogic data.

The competing giants amassed almost identical deal values in M&A transactions involving semiconductor companies, with China currently edging to the fore with deals worth USD 12.8bn and the US marginally behind with USD 10.5bn.

Trailing in their wake are the UK (USD 7.7bn), South Korea (USD 3.8bn) and the island of Taiwan (USD 1.8bn). When the going gets tough, super-charged superpowers get going.

Source: Dealogic

Despite rising geopolitical tensions, China and the US appear like similarly-minded twins now intent on parting ways and forging their own path. Yet their ambitions remain aligned: secure their supply chains and lead the way in technology.
Both countries are highly dependent on the chip-making powerhouses of South Korea and Taiwan for key segments of their semiconductor supply chains. And both nations are adopting increasingly protectionist policies to achieve these goals. This year, the largest M&A semiconductor deals in each were predominantly China-on-China and US-on-US transactions.

Shared goals aside, the US and China’s semiconductor sectors differ markedly, akin to Arnold Schwarzenegger and Danny De Vito’s characters in the 1980s movie, ‘Twins’.

Less is more: China’s focus on smaller deals, smashes VC investment record

China’s M&A activity in the semiconductor sector is dominated by smaller deals and includes more transactions involving early-stage and start-up companies. By contrast, the US has clocked up fewer, but much larger deals, reflecting a more mature and consolidated industry.

While both countries recorded a similar aggregated deal value in the January-to-September period, China closed 176 transactions compared with 41 in the US. The top five semiconductor transactions in China range between USD 464.4m and USD 980m in deal value, while the top five semiconductor deals in the US are worth between USD 1bn and USD 2.75bn.

In addition, China’s value of venture capital (VC) investment in the semiconductor sector rocketed to USD 3.5bn in the first three quarters of the year – smashing the previous record of USD 2.8bn set in 2020 (full year).

Source: Dealogic

No-go West: China’s outbound M&A hindered by Western tech blockade against Beijing

The abundance of smaller deals does not mean that China would not like to pursue larger targets – especially abroad. But the US is flexing its muscle and, when necessary, its long-arm jurisdiction by throwing a spanner in the M&A works and enforcing a Western technology blockade against Beijing.

The strategy is part of a long-standing US play to keep China at least two generations behind global state-of-the-art semiconductor capabilities, an approach that was in place before the Trump administration. Recall in 2016, the US government led by President Barack Obama vetoed Aixtron’s takeover by Chinese buyers.
Under the current Biden administration, CFIUS – a powerful US government body tasked with scrutinizing foreign investment – is intent on burying China’s largest outbound semiconductor deal of the year. The USD 1.7bn takeover of South Korea’s Magnachip Semiconductor by China’s Wise Road Capital could be stymied on the grounds of national security.

Beijing is learning – willingly or unwillingly – the art of patience through homegrown innovation. The US, though, is after bigger fish, not only through M&A, but also by attracting massive direct investment from TSMC and Samsung into greenfield projects involving building chip-making plants on home soil. Will China be fast enough to develop its own technologies and come out on top against an adversary intent on denying it the acquisition of sizeable foreign targets?

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