Don’t Leave Money On The Table

Selling a fabless semiconductor company works better if you cut the waste out of the operation and reduce operating expenses.

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By Jack Harding
The vast majority of private fabless semiconductor companies are venture funded and, rationally, anticipate an exit through acquisition. The statistics around achieving an exit via an IPO are daunting, at best.

But, as we have all read, the valuations are much lower than they once were. One of the reasons is the recent valuations of the acquirers are lower. But there is another reason, more subtle in nature, and it can be the difference between a good and a poor exit. Specifically, the FSC operations are so inefficient they drag down the purchase price from the acquirer.

Like all good business management, the way to a better valuation is a better balance sheet. Keep what’s necessary to keep in-house, and outsource wherever possible.
The VCP model, for one, can improve gross margins for customers by 2% to 7% by leveraging commercial and technical advantages. By aggregating buying power and technical skills there is less waste and a broader skill set.

That’s all part of a successful outsourcing equation. It includes lower, not to exceed, guaranteed pricing, which is something the internal ops team cannot do. Other benefits include WIP financing for “cash challenged” companies, and a reduction in operating expenses.

When an acquirer arrives in your lobby it is typically a larger, successful firm. Its folks look at the FSC’s financial performance; see the places to save cost and tuck that away for future benefit…for them.

This is not theory. It is happening today. Just this week investment bankers came to see me to understand how their client’s financial performance improved so dramatically over a weekend. The answer: The customer outsourced its existing production.

Everybody wins. The acquirer gets a more efficient and competitive target company. The selling FSC gets paid for improvements they have already made. The suppliers have a superior, efficient interface to the outsourcer. The bankers potentially get a higher fee but they certainly endear themselves to the VCs that invested in the FSC.

Waste is bad. The internal ops teams at small companies are wasteful. The change is coming fast. Improve your margins before the acquirer knocks on your door.

–Jack Harding is chairman and CEO of eSilicon


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