The Week In Review: Manufacturing

Lam buys Coventor; Applied joins ceramics group; M&A candidates; memory trends.

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Fab tools
In a move to expand its product portfolio, Lam Research has acquired Coventor, a provider of simulation and modeling solutions for the semiconductor and MEMS industries.

Lam Research held an analyst event at the recent Flash Memory Summit. The topics included 3D NAND and other technologies. In a blog, here’s what executives from Lam said at the event.

Analysts from RBC Capital recently visited several companies, including Lam Research. Here’s the takeaway from RBC analyst Amit Daryanani based on conversations at Lam: “1) WFE outlook for 2018 is positive and is increasingly less cyclical primarily due to change in end-market drivers as well increase in capex intensity without material increase in capacities. 2) China is likely not significant in 2018 but continues to grow. 3) Install base is highly cash flow generative but has below-average gross margins (~25% of sales is services). 4) LRCX is not concerned about NAND yields and notes that customer spend does not indicate anything outside of normal.”

Applied Materials recently joined the United States Advanced Ceramics Association (USACA), a group that represents advanced ceramic producers and end-user industries. Applied’s goal is to deepen its connection with the technology.

Chipmakers
After record consolidation in 2015, the semiconductor M&A activity has slowed in the first half of 2017 with eight deals totaling just around $1.8 billion, according to the Susquehanna International Group. This compares to 14 deals worth a combined $18.7 billion in the same period last year, according to the investment banking firm.

“We view a significant portion of the M&A pause as related to CFIUS, which has been slow to process deals under the new administration (evidenced by Lattice who has filed for approval three times now),” said Christopher Rolland, an analyst with Susquehanna, in a research note. “We still believe Lattice serves as the CFIUS ‘canary in the coal mine,’ which if approved (although we ascribe a lower probability for approval) could spark a re-emergence of semis deals. In addition to the regulatory environment, we note that some of the largest potential semi acquirers (AVGO, QCOM, INTC, MCHP, ON, ADI) are currently in the process of either completing deals or integrating recent acquisitions. Once the leverage ratios of these serial acquirers are reduced, it may reaccelerate buyout activity once again.”

So M&A is still alive and well in the semi industry. Based on various financial accretion metrics and other factors, Rolland listed his top five takeout candidates: #1) Integrated Device Technology; #2) MaxLinear; #3) Cavium; #4) Microsemi; and #5) Marvell.

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Here’s the latest on Lattice: “The Committee on Foreign Investment in the United States (“CFIUS”) has indicated that it will recommend that the President of the United States suspend or prohibit the proposed merger (the “Merger”) between Lattice and an indirect wholly-owned subsidiary of Canyon Bridge Fund I, LP (“Canyon Bridge”), a private equity fund with China-based investors,” according to an SEC filing. ”Lattice and Canyon Bridge plan to continue to engage in further discussions with CFIUS and the President to explore measures that may resolve any outstanding national security concerns and that could allow the parties to proceed with the transaction.”

Lee Jae-yong, vice chairman of Samsung Electronics, was recently sentenced to five years in prison for bribery. According to the Korea Times, Samsung faces some challenges, including renewed pressure to restructure the company. Separately, Samsung plans to invest $7 billion to expand its NAND fab in Xian, China, according to a report from the Korea Times and other news outlets.

Toshiba’s memory business is still on the block and the parent company insists that it is looking at various bidders to buy the unit. Western Digital and Toshiba could be close to a deal, however. “Recent press reports suggest that Western Digital could be close to finalizing a deal to buy into Toshiba’s memory assets through a financial consortium,” said Weston Twigg, an analyst with KeyBanc Capital Markets, in a research note. “If successful, it would put an end to the ugly legal dispute between the companies regarding the fate of Toshiba’s portion of their NAND manufacturing JVs. It would also provide Western Digital with additional NAND output from the JV, likely along with additional debt and capex commitments.”

The U.S.-Japan consortium that is bidding for Toshiba’s memory business includes KKR, the Innovation Network Corp. of Japan (INCJ) and the Development Bank of Japan (DBJ). Originally, the consortium included SK Hynix. But with Western Digital making a bid, SK Hynix appears to be no longer in the picture, according to reports.

Littelfuse has entered into a definitive agreement to acquire IXYS in a cash and stock transaction. The transaction represents an equity value of approximately $750 million and enterprise value of $655 million.

Market research
The memory market remains strong. “For DRAM, we are seeing high demand from server and data center customers, while PC makers and others need to maintain their allocation. Mobile DRAM demand remains strong, but it is growing at a slower rate than the server market. Overall, we think this suggests that monthly DRAM contract pricing should increase through the end of the year,” KeyBanc’s Twigg said.

“For NAND, we are starting to see SSD content growth slow due to high prices, though enterprise SSD demand remains strong,” Twigg said. “Mobile NAND demand remains high amid the Apple phone ramp, but could soften after. We also expect NAND supply to increase through the end of the year as the 64-layer 3D NAND products come to market. As a result, we expect NAND prices to flatten through the end of the year, with the potential for price declines in 1Q.”

How will Samsung improve its overall 3D NAND costs? In a blog, Jim Handy, an analyst with Objective Analysis, explains how.