It’s the End of the Semiconductor World as We Know it, and I Feel Fine

3b2e89aSurely you remember the semiconductor world? You've known if for a long time, right?

Well, it's over. Or, at least, the semiconductor world is over as you and I have known it for all these decades, and that’s not necessarily a bad thing.

Massive consolidation is coming, along with slowing market growth. Stock prices have been flat to down over the past decade for most companies. Now, a dwindling number of start-ups are being funded.

Does this mean the end of opportunities? Of course, not. It does mean that the opportunities - both for the industry and the people who love it - are different.

This blog post focuses on the causes and the economics behind the change. Next time around, I'll focus on what my friends in the semiconductor industry can do to take advantages of the Brave New Semiconductor World.

It's hard to know exactly how long it will take for the consolidation to fully occur. What we do know is this: as with all mature businesses, consolidation will happen at an ever-increasing rate. My guess is that we're looking at a ten year arc, but whatever the time frame, make no mistake, it is happening. Witness the mergers we have already seen this year with Avago acquiring LSI, and RFMD acquiring Triquint.

What makes these significant is the size of the acquired companies. LSI is a $2.4 billion/year revenue company, and Triquint is running at $700 million a year. Add in TI’s mammoth acquisition of National in late 2011, and you can see that larger and larger companies are being taken out.

You could remind me that acquisitions have been happening in the semiconductor business from the dawn of time. Go ahead. Remind me.

You're right.

Here's the difference: no longer are there a large number of new startups replacing the consolidated companies. Think of it like any sales funnel. You need new opportunities (startups in this case) to fuel growth. Sales, or in this case the number of companies, will shrink if there are not enough new companies being funded.

Why aren’t VC's funding semiconductor companies the way they used to? It’s not hard to figure out. VC's believe it takes about $70 million to fund a semiconductor business from inception through a liquidity event. VC's want a 10x return on their money.

See the problem? When was the last time a VC-backed semiconductor company IPO’ed with a market cap greater than $700 million? You don't remember? That's okay. Neither do I.

It’s a virtuous cycle. The number of successful semiconductor exits keeps going down, so fewer VC's invest in semiconductors. This leads to the VC partners with semiconductor domain expertise leaving the funds - and voilà! - that leads to less investment as well.

Money, as it does with most things in business, is driving consolidation. I expect activist private equity funds to push the underperforming semiconductor companies into acquisitions. That consolidation will lead to oligopolies in the various market segments. The resulting product price stability will increase profitability. Who will emerge as the leaders, and who will be acquired will be interesting to see.

I'm guessing you'd like to be a leader here. My next post examines what you can do if you are in the semiconductor industry.

That’s all for now,