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Front End I Electronic Components Supply Network


Merger and acquisitions continue in the


Semiconductor Sector


months later Marvell moved to enhance its internal chip design capability by agreeing to acquire the ASIC business of Global Foundries (previously owned by IBM) for $650M. The deal was funded at least in part by Marvell divesting its Wireless Connectivity portfolio along with 550 staff to NXP for $1.76Bn. These three deals were however eclipsed in June when Infineon announced its intention to acquire Cypress Semiconductor for $10Bn, a sum that represented a 46% premium on the then current Cypress share price. The debate about this premium continues among financial analysts but the best deals are those with the greatest upside potential and it’s fair to say that the price reflected the bidders’ view of the profitability and assets of the combined organisation and its future earning potential.


Integration actions Adam Fletcher T


he merger and acquisition (M&A) activity we’ve seen in the semiconductor industry in recent years looks set to continue, partly as a result of - and despite - the current slowdown in sales revenue growth. In this article Adam Fletcher Chairman of the Electronic Components Supply Network (ecsn) reviews what’s happened in the first quarter of this year and shares his thoughts on what any escalation in M&A activity is likely to mean for semiconductor companies, their customers and the authorised distributors who serve them both. Advances in semiconductor technology continue to fuel innovation within the electronic systems markets but the need to achieve ever better economies of scale is driving a need to amortise the rapidly increasing cost of semiconductor design and manufacture. Compounded by the relatively easy access to low cost funding this means that further consolidation in the industry is inevitable. Many small-scale acquisitions are in the pipeline as larger organisations strive to acquire the promising IP and technology developed by start-ups but it’s the big-name M&A activities that draw the headlines. In March ’19 Renesas completed its $6.3Bn acquisition of IDT. Combining the technology of both organisations will enable the new entity to offer improved solutions to the high growth automotive, industrial and infrastructure markets. Two


10 July-August 2019


Any M&A activity heralds a period of great uncertainty for the semiconductor companies involved, their employees and their entire supply network. In the short- term it’s understandable that directly involved people will want to know how the consolidation is likely to affect them and what they need to do to look after their own or their organisation's best interests, but Executive Management will inevitably be focused on redefining the new merged organisation and preparing proposals to maximise shareholder returns. It’s debatable whether a quick and dramatic reorganisation or a longer, carefully planned approach yields the best long-term results. Experience suggests that small integrations are best completed quickly, but the probable need to divest non-aligned operations often means that larger integrations need to develop over a much longer period. In both cases the company structure and resources will be extensively reviewed, as will the target markets to be served, the product families to be offered and yes of course, the customers that the combined company will serve. This is a highly complex task affected by many variables - not least the size and complexity of the merging organisations - and the outcome is rarely a perfect solution.


Rationalisation The M&A processes inevitably throws up an overlap in a wide range of job functions and - particularly with semiconductor companies - also within their Channel Partner (authorised distributor) network, where some form of corresponding rationalisation is often triggered. As


Components in Electronics


authorised distributors have the primary customer facing roles within the network it’s important that the merging organisations quickly draw a line under this uncertainty and maintain uninterrupted delivery of products ordered on time. Secondary activities to be maintained include booking new customer orders and securing new customer design wins for future business. The longer the level of uncertainty persists the harder it will be to achieve these secondary objectives, with the inevitable loss of customer confidence and sales revenues.


Customer engagement There is a mutual dependence between the direct and in-direct customers of a semiconductor manufacturer. Approximately 60% of all semiconductor products by sales revenue value are sold directly by the manufacturer to a small number of very large customers and sometimes even to single customers. Responsibility for the remaining 40% of all semiconductor products by sales revenue is left to their authorised distributors whose role it is to support the mass market, often comprising 1,000s of customers. Sales to direct customers keep manufacturing volumes high and enable economies of scale to be realised but a semiconductor manufacturer is generally able to make a much better margin on the sales made to in-direct customers. They also embrace the security that a wide diversity of customers and applications brings to their business as sales made to in-direct customers mitigate the potential risks posed by any over-reliance on a small number of direct customers. By any measure effective


communication with the customer base(s) should be an essential part of the M&A process. No semiconductor company can afford to alienate it customer base and will make every effort to disseminate accurate and timely information. However, recent experience shows that the provision of this information often lags a long way behind the implementation of other activities, probably reflecting just how critical all the other Executive Management actions are to the merged organisation. Fortunately, the trade media, email and social media platforms provide fast and wide access to information, be it positive or negative, which of course depends on the recipients' perspective. Such communication will often raise a multitude of questions, the answers to which may be commercially sensitive or yet unknown. In these


circumstance competitors are often perceived as being the more effective communicators as they seek to gain a competitive advantage during this period of reorganisation.


Improved communication Among the most important people to communicate effectively with are the employees of the merged organisation, some of whom may have been through the uncertainty of the M&A process multiple times. Their various roles and experiences make them an important conduit for effective external


communication both formal and informal. And in the age of social media what the employees say about a company’s reorganisation matters and can directly influence others inside (and outside) the company. Timely, positive discussions are a major contributing factor towards identification and implementation of solutions that amicably meet the organisations’, employers’, partners’ and customers’ competing needs. My best advice is for all parties affected by an M&A is to continue as normal but where possible positively enhance their organisations’ engagement both up and down the electronic components supply network, and within their personal social networks.


Adam Fletcher is Chairman of the


Electronic Components Supply Network (ecsn), a business association established in 1970 that today offers support to all organisations with an interest in electronic components throughout their entire lifecycle. He is also chair of the International Distribution of Electronics Association (IDEA), an association of individual country electronic components associations whose objective is to share best industry practice.


Further information about The Electronic Components Supply Network and afdec may be found at the following website: www.ecsn-uk.org with regular industry updates available to all on the Breaking News pages.


ecsn-uk.org


www.cieonline.co.uk


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