Clifford Chance

A new inflection point

The semiconductor industry is in the process of being reshaped by a sustained period of mergers and acquisitions. The past few years have seen hundreds of billions of dollars in transactions across the US, UK, Europe and Asia, and major players have indicated they expect to continue this acquisition streak. The CEO of Intel recently made the company's intentions clear, stating that 'there will be consolidation in the industry. That trend will continue, and I expect that [Intel is] going to be a consolidator'.[1]

What is driving semiconductor M&A?

M&A activity in the sector is being driven by a combination of factors, in particular:

• economies of scale and pooling of resources to tackle rising costs of resource intensive R&D, design and manufacturing
• huge demand for ever greater connectivity in everything from mobile phones to automobiles to household appliances, as well as next generation technologies such as 5G, internet of things (IoT), and augmented reality
• ensuring supply chain security
•  a desire to expand product portfolios beyond microchips (e.g. SaaS products)
• growing demand for custom chips and foundries
• acquiring highly specialised talent
• demand for cloud and data centre management technologies.[2]

Spotlight on recent high-value deals

• In 2019, Infineon, the world's largest supplier of microchips to the automobile sector, acquired Cypress Semiconductor Corp., known for connectivity chips, for €8.4B.[3]
• In 2019, NXP Semiconductors NV acquired Marvell Technology Group's Wi-Fi and Blue-tooth connectivity technology.[4]
• In 2019, ON Semiconductor acquired Wi-Fi chip maker Quantenna Communications for $1B.[5]
• In 2020, Marvell Technology Group combined with Inphi Corporation, a leader in high-speed data, creating a $40B company to position Marvell for opportunities in cloud and 5G.[6]
• In 2020, Analog Devices acquired Maxim Integrated Products for $21B, "aimed to increase market share in automotive and 5G chipmaking".[7]
• In 2020, AMD acquired Xilinx Inc for $38.5B, to create the industry’s high performance and adaptive computing leader.
• In 2020, Intel agreed to sell its NAND wafer and SSD business to SK Hynix for $9B.[8]
• In 2021, Qualcomm, a leader in 5G cellular technology, acquired NUVIA, a maker of CPUs and systems on a chip, for $1.4B, to position the company to meet demands for next-generation 5G computing.[9]
• In 2022, Intel acquired Tower Semiconductor for $5.4B, as part of its plan to become a provider of foundry services for other chip makers.[10]

The microchip supply chain crisis: public and private sector responses

The semiconductor industry has also been navigating serious supply shortages, increased costs of components and metals, and the pandemic's disruption of supply chains over the past few years. Supply shortages have led to cuts to automobile production and higher prices for consumer and healthcare electronics.[11] Chips have been in such limited supply that the CEO of Dutch company, ASML, recently reported that large industrial companies have been acquiring high-end washing machines in bulk to strip out microchips and re-purpose them.[12]

The private sector is taking a variety of actions to ensure supply chain resilience. Major chipmakers are developing or acquiring the capacity for at-scale manufacturing of custom chips, as well as developing stronger links with third party foundries.[13] Manufacturers dependant on semiconductors are investing in long term partnerships, joint ventures and collaborations, such as the recent joint venture entered into between Stellantis (the parent company of Fiat, Maserati and Peugeot) and Foxconn to design a family of purpose-built semiconductors for the automaker and third-party customers.[14]

Governments are also taking active steps to diversify and secure microchip supply chains, recognising  that microchips are a strategic resource impacting not just the tech sector but all industrial supply chains. More than 63% of the global supply of semiconductors are produced in Taiwan with 18% produced in South Korea,[15] prompting concerns in the US and the EU that their reliance on such concentrated production places them at a competitive and strategic disadvantage. As the EU Commissioner for the Internal Market puts it "without chips, no digital transition, no green transition, no technological leadership". But beyond industrial policy, the semiconductor supply chain has serious national security implications. Senior members of the US Administration have publicly alerted US Congress to the urgent need to invest in domestic semiconductor capacity and R&D, which has decreased from producing 37% of global supply in 1990 to 12% of global supply in 2021 and may leave the US vulnerable to supply chain disruption that would undercut its technical and military advantage.[16] Likewise, Europe's share of global microchip supply has fallen from 44% in 1990 to just 9% in 2021.

Significant public resources are being thrown at the problem with the US 'Chips for America Act', once it is funded by the US Congress, providing $52B in federal financing, followed earlier this year in Europe by the proposed 'European Chips Act' that will mobilise more than €43B in public and private investments. If these measures and incentives are successful, they would trigger a significant boost to 'next generation' semiconductor design, production and supply in the US and Europe, coupled with a potential flow of intellectual property from Asia in the form of collaborations and joint ventures as large segments of the value chain 're-shore' to the US and Europe (see our article: The EU Calls in its Chips: 'Tech Sovereignty' and New Opportunities from the EU Chips Act )

Managing tough regulatory scrutiny

Against the background of increased semiconductor M&A activity, there has been a general trend of cross-border M&A and foreign direct investment (FDI) being subject to increasing scrutiny worldwide, primarily driven by competition, national security and industrial policy concerns. These regulations are particularly stringent where advanced or sensitive technologies are concerned (see our recent article 'Successfully Navigating Tech Sovereignty and National Security'), and semiconductor M&A falls squarely within the scope of  these regulatory regimes.

Chipmakers and investors alike will need to seek expert advice on their high-stakes transactions as they are increasingly the focus of high-profile challenges by  governments and regulators, and resulting in increased scrutiny, uncertainty and risk.

Recent high-profile examples include:

• In 2017, Infineon dopped its offer to acquire the power and radio unit of Cree Inc., after it was unable to obtain CFIUS approval in the US. [17]
• In 2018 Broadcom, the producer of cellular chips, had its proposed takeover of Qualcomm Inc., the global leader in smartphone chips, blocked by presidential order after failing to obtain CFIUS approval, resulting from national security concerns over the impact on R&D investment in crucial 5G technology.[18]
• In 2018, Qualcomm failed to acquire Dutch chip maker NXP,[19] after it was unable to obtain antitrust approval for the transaction from the antitrust regulator in China.
• In 2021, Nvidia failed to acquire UK chip designer ARM,[20] after US, UK and EU regulators raised concerns about the impact of what would have been the largest ever semiconductor deal on competition in the sector. SoftBank, owner of ARM, has said that it would instead seek an IPO of ARM in the coming year.  However, this will not necessarily be the panacea for all regulatory risk, as significant investors will need to consider potential scrutiny under the UK national security regime.

Case Study: Nexperia's acquisition of Newport Wafer Fab (NWF)

Nexperia's acquisition of NWF is a clear example of the incredibly complex regulatory environment surrounding semiconductor M&A. NWF is the UK's largest producer of silicon wafers and specialises in high-end silicon semiconductor chips. In July 2021, Nexperia announced that it had acquired 100% ownership of NWF.[21] Nexperia is a Dutch company, however it is ultimately owned by Wingtech Technology, a Shanghai listed company.[22] The Foreign Affairs Committee of the UK House of Commons issued a report  recommending that the UK Government call in the acquisition for urgent review and the Prime Minister announced a review by the National Security Advisor.[23] Unusually, this review appears to be conducted outside the UK's new (and very broad) National Security and Investment Act regime which came into force in January 2022.

At the time of this article, the outcome of this review remains pending and the matter has become increasingly sensitive, with implications for US-UK trade relations; members of the US Congress have warned President Biden of security risks linked to the acquisition of NWF by Wingtech Technology and urged the President to take action to prevent the transaction, including reconsidering the UK's place on a CFIUS 'white list' and restricting exports to NWF.[24]

Conclusion

Demand for increased processor performance and supply chain security is unlikely to recede and all signs point to a continued trend of significant M&A activity and investment in the semiconductor sector over the next decade:

• High-value strategic acquisitions will continue to be on the agenda for major chipmakers. These transactions will need to be carefully managed through complex, multi-jurisdictional regulatory review processes that are not limited to  and increasingly include actively enforced foreign investment and national security regimes. 
• The dramatic boost in public funding from the US and the European Union may kick start the creation of entirely new next generation semiconductor businesses, joint ventures and collaborations, particularly if government polices succeed in relocating a substantial part of the design, production and supply chain back to the US and Europe from Asia.  
• A steady pipeline of small to mid-size transactions and collaborations in the coming decade as the largest chipmakers seek to add targeted capabilities, open new markets or try to limit regulatory and execution risk by focusing on lower value acquisitions, particularly if chipmaking activities are successfully 're-shored', along with their portfolios of next generation intellectual property.

References

[1] Intel CEO Calls Chip Maker ‘Willing Buyer’ as Semiconductor Industry Consolidates https://www.wsj.com/articles/intel-ceo-calls-chip-maker-willing-buyer-as-industry-consolidates-11629382046

[2] A wave of semiconductor consolidation drives big tech valuations in October https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/a-wave-of-semiconductor-consolidation-drives-big-tech-valuations-in-october-61152926

[3] German Chip Maker Infineon Buys U.S. Rival in $9.4 Billion Deal https://www.wsj.com/articles/infineon-to-buy-cypress-semiconductor-in-multibillion-dollar-deal-11559540811

[4] NXP to acquire Marvell’s WiFi and Bluetooth Connectivity Assets https://www.nxp.com/company/about-nxp/nxp-to-acquire-marvells-wifi-and-bluetooth-connectivity-assets:NW-NXP-PAY-FOR-MARVELL

[5] Quantenna acquired by ON Semiconductor for $1B https://www.fiercewireless.com/wireless/quantenna-acquired-by-semiconductor-for-1b

[6] Marvell to Acquire Inphi - Accelerating Growth and Leadership in Cloud and 5G Infrastructure https://www.marvell.com/company/newsroom/marvell-to-acquire-inphi-accelerating-growth-leadership-cloud-5g-infrastructure.html

[7] Chipmaker Analog Devices to buy rival Maxim for about $21 billion https://www.reuters.com/article/us-maxim-intg-m-a-analog-devices-idUSKCN24E14B

[8] SK hynix to Acquire Intel NAND Memory Business https://www.intel.com/content/www/us/en/newsroom/news/nand-memory-news.html

[9] Qualcomm to Acquire NUVIA https://www.qualcomm.com/news/releases/2021/01/13/qualcomm-acquire-nuvia

[10] Intel to acquire Tower Semiconductor for5.4bn to build on custom foundry strategy  https://techcrunch.com/2022/02/15/intel-to-acquire-tower-semiconductor-for-5-4b-to-build-on-custom-foundry-strategy

[11] Chip Shortages Are Starting to Hit Consumers. Higher Prices Are Likely. https://www.wsj.com/articles/chip-shortages-are-starting-to-hit-consumers-higher-prices-are-likely-11624276801

[12] The chip shortage is so bad companies are ripping them out of washing machines https://www.protocol.com/bulletins/chip-shortage-washing-machines

[13] Intel CEO Pat Gelsinger Announces ‘IDM 2.0’ Strategy for Manufacturing, Innovation and Product Leadership https://www.intel.com/content/www/us/en/newsroom/news/idm-manufacturing-innovation-product-leadership.html

[14] Stellantis and Foxconn form chip JV https://www.just-auto.com/news/stellantis-and-foxconn-form-chip-jv/

[15] 2 charts show how much the world depends on Taiwan for semiconductors https://www.cnbc.com/2021/03/16/2-charts-show-how-much-the-world-depends-on-taiwan-for-semiconductors.html

[16] Readout of Congressional Briefing on National Security Impact of Semiconductor Supply Chain and Importance of Passing Bipartisan Innovation Act https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/06/readout-of-congressional-briefing-on-national-security-impact-of-semiconductor-supply-chain-and-importance-of-passing-bipartisan-innovation-act/

[17] German Chip Maker Infineon Buys U.S. Rival in $9.4 Billion Deal https://www.wsj.com/articles/infineon-to-buy-cypress-semiconductor-in-multibillion-dollar-deal-11559540811

[18] Trump Orders Broadcom to Cease Attempt to Buy Qualcomm https://www.wsj.com/articles/in-letter-cfius-suggests-it-may-soon-recommend-against-broadcom-bid-for-qualcomm-1520869867

[19] Qualcomm Abandons NXP Deal Amid U.S.-China Tensions https://www.wsj.com/articles/qualcomm-plans-to-abandon-nxp-deal-1532549728

[20] SoftBank’s $66bn sale of chip group Arm to Nvidia collapses https://www.ft.com/content/59c0d5f9-ed6a-4de6-a997-f25faed58833

[21] Nexperia obtains 100% ownership of Newport Wafer Fab, to be renamed Nexperia Newport. https://www.nexperia.com/about/news-events/press-releases/nexperia-obtains-100-ownership-of-newport-wafer-fab-to-further-boost-production-capacity.html

[22] Newport tech firm ‘not notified’ amid takeover claims https://www.southwalesargus.co.uk/news/20039462.newport-tech-firm-not-notified-amid-takeover-claims/

[23] Sovereignty for sale: follow-up to the acquisition of Newport Wafer Fab https://publications.parliament.uk/pa/cm5802/cmselect/cmfaff/1245/report.html

[24] Republicans press Biden over Chinese deal for British chip factory https://www.washingtontimes.com/news/2022/apr/21/republicans-press-biden-over-chinese-deal-british-/