The owners of embedded software companies have long considered an acquisition by a semiconductor partner a logical exit strategy. We took a look at semiconductor acquisitions over the past two years with the aim of better understanding the dynamics of the market, and we came up with four critical questions:
- Which chip companies are using M&A to acquire software IP?
- What kinds of companies have they acquired?
- What kinds of valuations are being paid?
- What kinds of acquisitions do we expect to see in the future?
Chipmakers have routinely bought software firms for a variety of reasons. Frequently, the target offers a software development tool, middleware, or media codec that can be bundled with a particular processor's software development kit. Acquisitions also enable a slower-moving semiconductor company to compete in a new market quickly by obtaining technology. Large and highly profitable software companies are also frequently targeted for financial purposes, especially if a purchase would be accretive to earnings.
Sometimes the acquired company is deeply integrated into the buyer's product line. That was the case when Maxim Integrated Products Inc. (Nasdaq: MXIM) acquired Trinity Convergence in 2010 and when Texas Instruments Inc. (NYSE: TXN) bought Telogy Networks back in 1999. Large acquisitions may be more strategic in nature, and the seller may continue to operate as a separate operating division. Notable examples include the 2010 acquisition of McAfee for $8 billion and the 2009 purchase of Wind River for $900 million by Intel Corp. (Nasdaq: INTC), as well as the 2009 purchase of MontaVista for $54 million by Cavium Networks Inc. (Nasdaq: CAVM). A software company may also be acquired mostly for its patent portfolio. A good example is Intel's purchase this year of patents and codecs from RealNetworks for $120 million. Here's a deeper dissection of the activities involved.
- Which chip companies are buying software companies? Clearly, many chip companies are very acquisitive. Over the past five years, for example, Intel has acquired 48 companies, and Broadcom has acquired 16. According to Capital IQ, there have been 38 software acquisitions over the past two years. The most active chip buyers of software companies were Intel (with eight deals) and ARM, Imagination Technologies, and AuthenTec (with two each).
- What valuations are being paid? After removing some of the outliers, we arrived at a few metrics for deals made over the past two years.
- Average deal size: $49 million
- Average enterprise value/revenue multiple: 5.2 times
- Average enterprise value/EBITDA multiple: 20 times
The valuation of your company may vary substantially from these metrics, but they offer some data points. If you want a more specific idea of what your company may be worth, contact a licensed M&A adviser, such as the McLean Group.
What kinds of technologies are being acquired?
Over the past two years, we saw a significant number of deals in user interface (UI) and multimedia, followed by security. Clearly, there have been two key trends: Compelling user interfaces and multimedia are needed to drive sales of consumer electronics of all kinds, and security is becoming more and more of a concern in the mobile connected world. UI and multimedia deals ranged from 3D graphics and mobile user interfaces to video, VoIP, and image processing suites. Security software deals included Intel's $8 billion deal for the enterprise security software company McAfee and smaller deals for firms like PeerSec Networks.
What do we expect to see in the future?
Part of my job is to stay current with the interests of chip company executives as they consider acquisitions. There are a few common themes. Chip companies are looking for scalable software solutions that can be easily integrated into a product line and can leverage the broader sales team. Security is increasingly important, especially for mobile electronics.
Finally, the "iPhone effect" continues to impact electronics as users demand experiences that are graphically pleasing and intuitive. This continues to create demand for UI frameworks, 3D imaging, and video optimization in devices ranging from mobile phones to STB, TV, automotive, and other consumer devices.
The following is a representative sample of the transactions in the last two years.