INDUSTRY MICROELECTRONICS
Right now, a massive merger is being planned between US giants TriQuint and RFMD, two firms that are considered by many to be complementary.
“RFMD is much stronger in handsets, TriQuint is much stronger on the defence side, and although there are obvious overlaps, the strengths of the two companies seem to match up pretty well,” says Eric Higham, Director for the GaAs & Compound Semiconductor Technologies Service at Strategy Analytics.
Voicing similar views is James Klein, currently Vice President of Infrastructure and Defence Products at TriQuint. Klein, who in the new outfit will be the President of Infrastructure and Defence, believes that customers are excited about this merger: “We will bring into play a broader portfolio and a broader set of technologies, especially in the infrastructure business.”
The still-to-be-named venture should generate about 75 percent of its revenue from the sale of products to handset manufacturers. In this sector, which is migrating towards integrated modules, the new company has all the key building blocks, including GaAs broadband amplifiers, high-volume CMOS PAs, antenna switches and a range of filters. Using this extensive portfolio to launch new products should not prove that taxing, as RFMD is already using TriQuint’s filters in some of its products.
In the defence, aerospace and infrastructure division, Klein points out that there is little overlap between the two companies’ products. “TriQuint has been more in the defence space and optical, and RFMD has focused on some other spaces, like WiFi and wireless LAN.”
Soaring valuations for both companies highlight the investor backing behind the joining together of the two chipmakers. After announcing the merger on 24 February, TriQuint’s closing share price for jumped from $9.23 to $11.64 and has since risen to more than $13 – and RFMD’s shares have climbed from $5.81 to $7.03 and then on to just above $8 over the same timeframe.
TriQuint brings filter technology to the party, and I would think that should provide a good leg-up for the combined company. RFMD is
pushing pretty heavily on the front-end module approach, and being able to have filters in there – and to have them
home-grown – will be an attractive feature.
Within two years of completing the merger, the board of the new company – which will be made up of five directors from both companies, and led by RFMD’s CEO Bob Bruggeworth – should have overseen savings of at least $150 million in cost synergies that will enable operation at a gross margin of 45 percent and an operating margin of 25 percent. Part of the cost cutting will result from redundancies, and some analysts are suggesting that TriQuint’s GaAs fab in Oregon that produces many of the company’s PAs will go.
Sum together the revenues of RFMD and TriQuint and it suggests that the new company should deliver annual sales of $2.067 billion. But that’s a very simplistic calculation. Handset manufacturers tend to deal with two suppliers for their products to reduce supply chain risks, and if RFMD and TriQuint have those contracts, a new second source may be enlisted that will put a dent in the revenue of the new outfit. However, Higham thinks that this drawback might be outweighed by additional sales, which are the result of handset makers wanting to work with a very big company that operates at superior economies of scale.
Business model The handset side of TriQuint’s business has recently come in for criticism from one of its key investors, Starboard Value, which owns about 8 percent of the firm’s shares. This investor wrote to TriQuint on 29 October, 2013, arguing that more than 100 percent of the company’s profits were coming from the networks & defence and bulk acoustic wave filter businesses; but the strong performance of these divisions was overshadowed by
the mobile PA business, which suffered from significant utilization issues and missed design cycles. In this letter, which can be viewed on the SEC web site, Starboard also claimed that the PA business operated at gross margins below 10 percent over the last 12 months.
In this correspondence from Starboard, these investors blamed losses on an inefficient manufacturing model, while praising the fab-lite approach taken by Skyworks and Avago. About those two firms, Starboard wrote: Both companies manufacture only a portion of their products internally, while relying on foundries to produce some of their products and for ‘swing capacity’ when volumes increase significantly.
Higham, who has read the letter from Starboard, broadly agrees with the analysis of the relative profitability of the various divisions within TriQuint. However, he is not convinced by the argument that a fab-lite structure is a pre-requisite for good margins. In his view, the recent success of Skyworks, relative to RFMD, is not simply due to differences in the approach taken to chip manufacture – it also depends on customer relationships.
To explain his view, Higham considers the recent history in the PA market. He points out that that it was not that long ago that RFMD was the number one in the handset market, due to its close relationship with Nokia, the leading handset manufacturer of the time. “Since RFMD had such a tight tie-in with Nokia in their heyday, it forced other companies, primarily Skyworks, to find other technologies, make other
June 2014
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