Wave of consolidation hits chipmakers

A file photo of a semiconductor wafer.
Zigy Kaluzny | Getty Images

Over the last 12 months, there has been a spike of mergers and acquisitions activity in the semiconductor industry totaling $78 billion. Now investors want to know: Which chipmaker could be the next target?

Just this week, headlines have been coming in fast and furious about the dramatic consolidation now potentially redefining this sector. Shares of Analog Devices and Maxim Integrated Products jumped on reports that the chipmakers are in merger talks.

This followed news that Fairchild Semiconductor as well as SanDisk hired banks to explore possible sales.

These are just the latest deals to hit the sector. Intel agreed in June to buy Altera for nearly $17 billion; Avago Technologies said in May it would buy Broadcom.

After decades of solid growth, the semiconductor industry is maturing, say analysts. Research firm Gartner forecasts that worldwide shipments of personal computers, tablets and smartphones will grow just 1.5 percent this year to 2.5 billion units.

Fewer devices mean fewer chips. In fact, chip sales will actually dip about 1 percent in 2015 to $338 billion, according to Mark Hung, a research vice president at Gartner.

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Analog, Maxim shares spike on reported merger talk

However, Hung notes that the cost of manufacturing chips remains high, as much as $100 million to produce a single leading-edge chip set.

In order to navigate these dual headwinds of slowing growth and elevated research and development costs, more chipmakers are exploring consolidation as one strategic option. The hope is that a combined company can scale the business, cut costs and boost profit margins.

So, which chipmakers are attractive take-out candidates?

RBC's Amit Daryanani suggests that the next likely targets could be companies boasting relatively high gross margins — roughly 60 percent — and where there is room for cost cutting on operating expenses.

Names that fit the bill, according to Daryanani: Maxim Integrated Products, Semtech Corp., Power Integrations and Cypress Semiconductor.

Power Integrations and Maxim declined comment. The other companies did not immediately respond for comment.