I do expect to see this trend continue more or less indefinitely. Many chip companies like Texas Instruments and Intel, and IP firms like ARM and MIPS have very well-cultivated ecosystems of third party software partners. It doesn't mean that semiconductors will or should acquire all these partners. But often times they go into a big OEM lacking some sort of software and it's not enough to refer the customer to a 3rd party. Maybe this big OEM customer has a very important high-volume design planned, and they want "one throat to choke" with the chip vendor and software solution. Often they want one entity to own both silicon and software. This will often drive chip companies to acquire software partners to bring the capability in house and better support big OEM customers.
Brent, Thank you for the additional perspective. In your opinion, with regard to the semiconductor sector, do you see in future many more strategic acquisitions as companies in the market expand offerings? I ask because for chipmakers, it is becoming obvious that supplying only hardware (silicon) is not enough. OEMs now want more and would prefer chip vendors that have embedded software applications in their hardware offerings.
If this is the case, I guess we should expect more of the small to mid-size acquisitions that you've discussed in your postings.
Thanks for the comments. You are right that while the focus of my post was about mid-sized companies, looking at the big deals is always interesting. One way I look at acquisitions is sort of binary - a financial aquisition or a strategic acquisition. (The reality is that most deals are a mixture of both.)
You mentioned Freescale and NXP acquisitions, both of which were acquired by private equity and later taken public. Deals like these, where a larger company is acquired by private equity, are typically financial acquisitions. Meaning, they take over the company, restructure it, hopefully make it more profitable and attractive, and then sell it either to a strategic buyer or sell it by taking it public. Sometimes they win, sometimes they lose, but that is all part of the business model of private equity.
Of course not all financial acquisitions are done by private equity. All that it means is that one company acquires another company where the key interest is the profitability of the target, as measured by EBITDA typically. (Earnings before Interest, Taxes, Depreciation, and Amortization).
A strategic acquistion is where the buyer can take the seller's offering and leverage it in a lot more places. A good example of this is my blog from last week, about chip companies acquiring software companies. For example, maybe a processor company acquires a company with a graphics software development engine. The buyer can leverage the tool kit across dozens of product lines, earn more design wins, and ultimatley sell more chips and make more revenue. So the acquisition is strategic in nature rather than financial.
But again, most acquisitions, especially mid-larger ones, are a mixture of both strategic and financial interest.
Brent, Many of the additional factors (beyond the typical sales and profit metrics) you discussed as being critical factors that weigh in when a company's value is being determined seem to come down to goodwill, that vapor-like essence of what makes a company different from the competition.
I certainly agree with you that the potentials of the company, its likely market size and position, current market standing and ability to penetrate deeper, the value a potential purchaser places on its essential employees and the buzz it creates in the market place deserve a premium. Assigning a value to these factors is often very difficult and sometimes the wrong value is placed on these - up or down.
I recall AOL's reverse-acquisition of Time Warner years ago (it was a burst for the buyer -- in this case Time Warner's shareholders) and the foray of some leverage buyout specialists into the semiconductor market in the last decade. These include the purchase of Freescale and NXP Semiconductor. The buyers lost their shirts and it's not clear how they've made out years later.
But these are bigger companies and your blog was about mid-size entities. Often, the valuation comes down to the gut feeling of the lead acquirer. If it feels like the fit is right, in terms of the product, and the corporate culture is equally correct, then the premium goes up. If these don't fit, a potential buyer should walk away notwithstanding the value and price of the target company.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.