Semiconductor Investment or Extraction?

It is expensive to participate in the Semiconductor industry. Billion dollar fabs are needed, full of equipment their weight worth in gold. Chasing the leading edge technology while being chased by obsolescence. Moore’s law has not created a linear market but an industry full of exponential increases. The cost of developing new technologies and new products are dramatically increasing as are the costs of manufacturing facilities and equipment. The only element of the semiconductor business model that is slowing down is revenue growth.

This development is changing the business models of semiconductor companies. Not all companies are participating in the technology race anymore. Some have become predators and live of acquiring other companies. Others have outsourced most of their manufacturing and other elements of their business hoping that the loss of value chain does not impact overall value creation. There are also companies that are consolidating their operation trying to make careful strategic bets hoping to create golden eggs – products that can withstand the technology race and deliver revenue for many years.

What used to be one business model has morphed into many different business models. For most stakeholders in the industry, it is important to understand the business model as it can predict the behavior of semiconductor companies in certain situations. If you work for, sell to or buy from a semicoductor company, you want to know.

One of the key financial metrics you want to follow is the R&D spend. If a company is not investing in the future there is a high likelyhood they are focusing on extracting value from their current relationships. You don’t want to work with semiconductor companies that want more of the cake, you want to work with companies baking bigger cakes. The largest spenders are not necessarily the best companies to work with, but there is a correlation.

 

Semi R&D Compare to other industries report

 

 

The semiconductor industry outspends most other industries, even the pharma and biotek industry that do a good job of telling everybody how much they invest. The R&D spend is increasing although the Q4 spend was down compared to the same quarter last year. We believe this increase will continue givent the challenges the industry is facing from a product development perspective and technological perspective.

What looks like an impressive spend in another industry can be unambitious in semiconductors. You need to compare the spend to other semiconductor companies to get any insights. The large spread of R&D spending in the semiconductor industry combined with other information can uncover different business models. There are investor and extractor companies in the semiconductor industry.

We believe this matters to all stakeholders in the industry. We are currently working on a report that dissects the Q4 results and the business models of the top semiconductor companies. Sign up for a notification here.

 

Engagement Group is enabling Semiconductor, and other Hi-tech Companies grow Organically by using the Power of Social Networks.

We create content that engages customers. We create connections to new decision makers. We help salespeople get new revenue from new accounts.We make your organisation ready for the social network tsunami. You need to understand the social principles to survive and surf the wave.
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Micron and Hynix will not be catching Toshiba Semi

The air is thick with rumours about Toshiba’s semiconductor division. Toshiba has massive losses on their nuclear operation and desperately needs cash. The only division in Toshiba that makes a meaningful profit is the semiconductor division. After having announced the Semiconductor division is going to be divested into a separate company, Toshiba has opened for outside investors to buy a share in the new company. Their want to base the investment on a valuation of the company of 17B$.

 

Negotiation tactics.

Toshiba knows very well that nobody wants to buy a share, only a complete acquisition will make sense. A valuation of 17B$ would require the company to have a consistent revenue growth rate of 5%+ (last decade has been negative) and a Gross Profit margin of 23%+ (last quarter the GPM was 12.4%). The current business model is not even cash flow positive as it is estimated that the unit has a capital expenditure of over 1.5B$ a year. The semiconductor division needs to be combined with another company to unlock the required value.

Toshiba can attract investment in their memory division but not in their supervision of its operation.

 

Scale of economies

Amongst the suitors are two of Toshiba’s largest competitors, Micron and SK Hynix. If any of the companies succeeded, they would both make it to number two spot in the NAND flash market behind Samsung. They would triple in revenue in the process which is likely to create scale of economies that could unlock the value of Toshiba’s Semiconductor division, so an acquisition could make sense from a financial perspective. But would it be approved by the authorities?

 

Establishing market concentration

The Herfindahl-Hirschman Index or HHI sounds like a terribly complex financial parameter but really is a simple way of understanding the concentration of a market. In its simplest form, HHI is a percentage between 0% (Infinite number of small companies and 100% (A perfect monopoly of 1 company). A low HHI indicates a highly competitive market and a high HHI suggest that the market could be non-competitive. The US Department of Justice considers a market above 15% as moderately concentrated and a highly concentrated market has an HHI over 25%. Generally, the US DOJ will not accept mergers that create markets with and HHI above 25%. EU are interested in markets with HHI’s over 10% and will bar a merger that creates an HHI change over 2,5%. The US and EU can base their decision on other reasons than HHI alone but the current environment is not very merger-friendly. The semiconductor industry has become strategic to governments and trade blocks around the world. China has made no secret of this with their ambition to become the leading manufacturer of semiconductors and is already well underway. A violation of HHI rules is all the excuse a government need to block a merger.

For the semiconductor market as a whole, the HHI is 6% and should cause no anti-competition problem but for the NAND market it looks very different:

HHI Toshiba-01

 

The current HHI of 22.7% is above the EU radar horizon but below the US assigned threshold of 25%. As can be seen on the chart, both a Micron-Toshiba and an SK Hynix-Toshiba merger would trigger the HHI thresholds of both EU and the US. With a change in HHI of 3.9 to 4.1%, well above the EU trigger point, these mergers would create a new market with an HHI of 26.6 to 26.8% well above the US trigger point.

We do not believe Micron or SK Hynix will be allowed to acquire the semiconductor division of Toshiba, no matter how much they would like to.

 

Engagement Group is enabling Semiconductor, and other Hi-tech Companies grow Organically by using the Power of Social Networks.

We create content that engages customers. We create connections to new decision makers. We help salespeople get new revenue from new accounts.We make your organisation ready for the social network tsunami. You need to understand the social principles to survive and surf the wave.
Visit Engagement Group for more information or contact Claus Aasholm.

Interested in Semiconductor market research or social selling? Join our mailing list here.

You can get the free “Selling Insights for the Semiconductor Industry” report here.

 

 

Memory on a silver platter?

Toshiba has once more demonstrated that Conglomerates with semiconductor divisions behave very differently from pure-play semiconductor companies. Business issues elsewhere in the corporation are forcing Toshiba to sell the only part of their business that makes money. Although the bait was for 20% of the division, everybody knows that Toshiba will have to sell it all. The value of the standalone semiconductor unit is less than the value of the division combined with a business in another company.

Toshiba For Sale-01

 

 

 

The hierarchy of memory

Toshiba is a big player in non-volatile Flash memory. Although not sufficiently fast to replace the DRAM that processors need close by, Flash is a lot faster than hard disks and placed between the two. A lot of flash memory between DRAM and Hard Disk Drives (HDD) in the memory hierarchy, drives the total performance of the memory system closer to DRAM and the price per bit closer to HDD memory. Market leader Intel has made no secret of their big bet in Flash Memory. They know processors, and fast memory is in love and wants to be close.

 

Screen Shot 2017-03-02 at 15.22.55

 

Intel investing in Flash means they do not consider it a commodity and believe they will have commercial advantages by being able to sell both the processor and the flash at the same time. In short, memory is worth more in a CPU company than it is stand-alone.

 

The suitors and their reasons

SK Hynix, Micron – Both playing in the Flash market Hynix and Micron is interested in Toshiba for “scale of economies” reasons. An acquisition would make them stronger in the flash market and would allow them to command larger R&D budgets and CAPEX expenditure. Memory fabs and technology is expensive. Intel’s big bet on memory is founded on the argument that memory is worth more when sold together with processors. If this is right, Toshiba will be worth less in Micron and Hynix than it will be in some of the other constellations. What something is worth and what somebody wants to pay for it is two different things, and Toshiba could end up here.

Westen Digital – Being a key player in Hard Disk Drives, Western Digital is well positioned at the low end of the memory hierarchy and want more. They have already demonstrated their appetite for flash by acquiring SanDisk recently.

Foxconn, Softbank – Both companies are significant stakeholders in Apple. Foxconn handles most of Apple’s manufacturing, and Softbank owns ARM – the processor IP of Apple’s CPU’s. They are interested in Toshiba as Apple are one of the largest consumers of Flash for all their products. This Apple Mafia has announced a joint venture investment company this week, undoubtedly to bid for Toshiba and command even more of Apple’s need. It would be a miracle if Apple were not part of these conversations.

Bain Capital – As an investment company, Bain has already made some investments in cloud-based companies, cloud computing and SAS companies. For them, it is a datacenter play in line with their existing technology investments.

SilverLake – Investigating SilverLake’s investments reveals a couple of interesting positions. Broadcom, also a player in the processor and datacenter space and Alibaba – the Amazon of China. (Also Softbank has a stake in Alibaba). Alibaba wants to be the future trade platform for companies selling to consumers and know this will rely heavily on cloud computing. Currently, only 8% of Alibaba’s revenue is associated with the cloud.

Tsinghua Unigroup – The preferred semiconductor investment vehicle of the Chinese authorities are undoubtedly interested in Toshiba, but is not likely to receive approval from the Japanese authorities.

Any of these suitors are possible winners of the bid for Toshiba, but we believe the Apple Mafia is likely to be able to unlock most value from the deal.

 

Full article in the Korean Herald here

 

Engagement Group is enabling Semiconductor, and other Hi-tech Companies grow Organically by using the Power of Social Networks.

We create content that engages customers. We create connections to new decision makers. We help salespeople get new revenue from new accounts.We make your organisation ready for the social network tsunami. You need to understand the social principles to survive and surf the wave.
Visit Engagement Group for more information or contact Claus Aasholm.

Interested in Semiconductor market research or social selling? Join our mailing list here.

You can get the free “Selling Insights for the Semiconductor Industry” report here.