The Next Wave Of Consolidation

End markets and technologies are changing, stock prices are up, and interest rates are down. Those are the necessary ingredients for acquisition binging. So why isn’t much happening?

The answer is that more industry consolidation is ahead, but it’s all happening more slowly than the economics would suggest. Some of the reasons are obvious, others less so.

The big delay is the COVID-19 pandemic, which is limiting the ability of companies to negotiate sales or mergers in person, and for the buyers to conduct their due diligence. It’s difficult enough to do this in person. It’s nearly impossible over a Zoom call, no matter how good your connection. The same goes for financial audits that are a precursor to any deal. So until companies are willing to put their employees on planes or conduct in-person meetings, the number of acquisitions will be extremely limited.

The reason the Nvidia-Arm deal was forged in the midst of this pandemic is those companies had a long working relationship. But for the rest of the industry, it’s the key reason why the M&A business has hit the brakes. Even in cases where there are multiple potential buyers, most companies want to understand the culture of the company they are buying, and to examine the processes that are in place within those companies, to see whether they are compatible.

The second factor is the ongoing trade war between the United States and China. While some observers believe U.S. pressure on China will continue regardless of who gets in, there likely will be a softening of the rhetoric and the trade restrictions if the current U.S. administration is voted out. China is a huge market for semiconductors, IP, manufacturing equipment and expert services, and there is pressure from a number of chip industry groups to keep that trade flowing.
But buying companies remotely in the midst of a hostile business climate would be considered at best a gamble, and at worst really bad judgment on the part of the acquiring company’s leadership.

There are other factors involved here, as well. One is that nobody can tell yet how quickly new technologies such as 5G will be adopted, and where they will work best. This has been a big challenge for the communications industry. While sub-6GHz 5G is an obvious upgrade to 4G, the millimeter wave spectrum is a whole different story. Signals attenuate quickly, they are subject to interference, and it’s not clear how smoothly all of this will work or where it is best utilized. That makes acquisitions more iffy.

The same applies to the automotive market, where full autonomy is being pushed back further and further. While it’s likely that some autonomous features will be allowed in restricted areas, the ability to push a button and say drive home through traffic and bad weather is still science fiction — unless, of course, you’re willing to put a supercomputer in the trunk of the car. In addition, the struggle over differentiation of increasingly autonomous vehicles has pitted the big carmakers against their Tier 1 suppliers, and how that will impact the supply chain is still to be seen.

Finally, the whole chip industry is beginning to rethink how chips are put together. Moore’s Law will continue, but only for some digital logic by the time designs head into the 2/1nm realm. The rest of those designs will be pushed onto other chips, or chiplets. And while that approach seems inevitable, there are a variety of standards and ecosystem issues to work out before this part of the market consolidates like the previous IP market did. There are plenty of startups working in this space, but at this point picking the successful ones is nearly impossible.

More consolidation is coming, but the timing and in which markets are still fuzzy. If the pandemic is brought under control over the next year, M&A activity will likely surge. But there are still a lot of unanswered questions about timing and markets that could disrupt that timetable.

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