4 Likely Buyout Targets as Semiconductor Industry Consolidates

The Semiconductor industry is undergoing a massive consolidation wave. A huge number of mergers and acquisitions (M&A) worth hundreds of billion dollars have taken place over the last few years.

4 Likely Buyout Targets as Semiconductor Industry Consolidates

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Consolidation is natural in a mature industry like semiconductor which is now more than 60 years old. This industry is currently plagued with two huge challenges, which include escalating costs of producing chips for devices and a sluggish growth rate.

With continued innovation over the decades, the size of chips has shrunk to that of a few atoms, while the costs of producing these have flared up. Moreover, escalating costs for designing, packaging and testing are becoming unaffordable for most companies, especially for the smaller firms.

Additionally, the industry has been countering a sluggish growth-rate challenge despite  big trends like Internet of Things (IoT) which is believed to add an extraordinary volume in sales of electronic devices. Over the last 15-20 years, the semiconductor industry has recorded growth at an annualized rate of less than 5%.

M&A is the Rescue

In such a turbulent environment, semiconductor companies need to be huge in order to compete effectively. Therefore, these companies have resorted to M&A in an effort to grab more market share, cut costs, boost productivity and improve investment returns through scale economies.

Over the last 24 months, the industry has witnessed more than 10 major mergers and acquisitions which have a combined worth of more than $100 billion, such as the buyout of Altera by Intel Corporation (NASDAQ:INTC) and purchase of Broadcom Ltd (NASDAQ:AVGO) by Avago, which retained the name of the acquired company.

The acquisition of Altera has helped Intel get a chip technology which the latter, otherwise, did not have i.e. field-programmable gate arrays (FPGAs). This technology has strengthened its server offerings which enjoy huge demand from data-center operators. Also, FPGAs are very useful in IoT implementation which is a big trend in the technology sector, at the moment.

Similarly, the Avago-Broadcom merger has made the current Broadcom the leading diversified communications semiconductor company in the world. This alliance has also resulted in annualized cost synergies of approximately $750 million — a perfect example of enhancing market share and improving economies of scale through M&A activity.

Industry Signaling a New Consolidation Wave

The last few months have been eventful for the industry in terms of M&A activities like buyout of Cavium by Marvell Technology and Microchip Technology Inc. (NASDAQ:MCHP) taking over Microsemi Corporation (NASDAQ:MSCC). The most interesting is Broadcom’s aggressive approach of buying QUALCOMM, Inc. (NASDAQ:QCOM) which, looking at the current scenario, seems to be turning out as a hostile takeover.

All the recent M&A events are hinting toward a new wave of consolidation in the semiconductor industry in the near future.

Grab this Emerging Opportunity

M&A announcements generally result in a massive surge of the targeted company’s share prices, thereby providing investors an opportunity to make huge money overnight. As the consolidation cycle for the semiconductor industry does not seem to end any time soon, it is wise to stay focused on stocks that can be a potential takeover target.

We, at Zacks, have searched four semiconductor stocks which might get an acquisition offer in few months’ time.

Likely Buyout Targets as Semiconductor Industry Consolidates: Cirrus Logic, Inc. (CRUS)

The first stock in our list is Cirrus Logic, Inc. (NASDAQ:CRUS) which is a specialist in making audio-chips. However, for the past few quarters this company has not been performing well due to its overdependence on a single customer — Apple Inc. (NASDAQ:AAPL) — which accounts for more than 75% of its total revenues.

Apple’s latest iPhone X sales have remained below expectations, in turn hurting Cirrus Logic’s overall financial performance. Due to this, the company’s shares have plummeted in a year’s time. The stock is currently trading near its 52-week low and has lost 17.8% of its value over the past year.

Also, the company is highly undervalued as it trades at a forward P/E multiple of 10.1x, which is a significant discount to the industry average of 14x.

We believe there is no such problem in the company’s business model. It is a good takeover target for companies which are specialized in providing hardware to smartphone makers like Qualcomm. Moreover, the cheap valuation makes it an attractive buyout opportunity.

Likely Buyout Targets as Semiconductor Industry Consolidates: Smart Global Holdings Inc (SGH)

Smart Global Holdings Inc (NASDAQ:SGH), which is a leading provider of DRAM memory to the Brazil market, is another semiconductor company which looks like a potential takeover target. Although the company was founded 25 years back, it got listed in May 2017.

The company’s last three quarterly results have been stellar, thanks to elevated demand as well as prices of DRAMs. According to various research reports, the prospects of DRAM memory chip makers will remain bright this year due to supply shortage.

Furthermore, although the stock has soared a whopping 182% in the last year, it is still undervalued given the fact that it currently trades at a forward P/E multiple of just 7.6x, significantly lower than the industry average of 14x. Moreover, the company has an expected long-term EPS growth rate of 15%, much higher than the industry average of 10.2%.

Likely Buyout Targets as Semiconductor Industry Consolidates: Marvell Technology Group Ltd. (MRVL)

Marvell Technology Group Ltd. (NASDAQ:MRVL) may also be another acquisition target as the company is a promising player in the solid state drive (SSD) controllers market. Over the coming years, we expect an increasing number of PCs/servers to use the flash-based solid state technology for storage.

The storage market has been witnessing a steady increase in demand, given fast-growing data volume, especially the exponential growth in unstructured data.

Various research firms suggest NAND (non-volatile storage technology) demand will remain very strong in 2018 as well. This demand will also rise further and might even surpass the manufacturing capacity, leading to periodic shortage and higher pricing in the near term. Marvell has been benefiting from this growing demand for SSD products.

Further, although the stock has appreciated 47.9% in a year’s time, it is still undervalued given the fact that it currently trades at a forward P/E multiple of just 17.8x, significantly lower than its industry average of 24.9x. Moreover, the company has an expected long-term EPS growth rate of 16.3%, way higher than the industry average of 9.1%.

Likely Buyout Targets as Semiconductor Industry Consolidates: MaxLinear, Inc. (MXL)

Another potential pick is MaxLinear, Inc. (NYSE:MXL), which is a provider of radio-frequency analog and mixed signal semiconductor SoC solutions for broadband communication applications offering small silicon die-size, and low power consumption.

The company recorded a 31% increase in its last quarter revenues which indicates that its increased investment toward sales and marketing are paying off. We believe although elevated expenses are hurting its near-term profitability, these will have long-term benefits.

The stock currently trades near to its 52-week low and has lost 9.8% of its value over the past year. Also, the company has a forward P/E multiple of 14.2x, which is almost in line with the industry average of 14x.

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