With trade tensions -- and with them, worries about Chinese regulatory opposition to U.S. M&A transactions -- having cooled a bit lately, the stage might be set for additional chip industry consolidation. And indeed, on Tuesday morning, Cisco (CSCO) announced it had agreed to purchase optical component/module firm Acacia Communications (ACIA) for $2.6 billion.
In an interesting report released over the weekend, KeyBanc Capital made the case that efforts by larger chip industry firms to grow their scale and customer bases will drive additional consolidation, as will their wish to be better-exposed to growing IoT, automotive and cloud end-markets. The firm declared vision processor supplier Ambarella (AMBA) and (though its steep earnings multiples are a possible deterrent) highly diversified Silicon Labs (SLAB) to be the firms in its coverage universe most likely to be targeted by bigger players.
Here are three types of chip industry firms that could see fresh M&A activity in the coming months.
1. Analog and Mixed-Signal Chip Suppliers
This is a field that has seen a lot of consolidation already, but which is still pretty fragmented. Moreover, it still contains a number of smaller players with good exposure to IoT, automotive and/or cloud data center end-markets, and the fact that acquirers in the space generally have a good track record of making deals pay off with the help of cost synergies and better pricing power could also help fuel additional dealmaking.
Diversified suppliers of analog/mixed-signal chips and microcontrollers, such as ON Semiconductor (ON) and Maxim Integrated (MXIM) , are potential targets, as are power management chip suppliers such as Monolithic Power Systems and Power Integrations (POWI) . Firms with strong exposure to telecom and networking end-markets, such as Macom Technology Solutions (MTSI) and MaxLinear (MXL) , could also conceivably receive bids.
2. Chip Equipment Firms
While a pair of mega-deals in this space have been blocked by U.S. regulators over the last few years, larger chip equipment firms still seem interested in expanding their product lines by acquiring smaller firms. In March, KLA-Tencor (KLAC) closed a $3.4 billion deal to buy Orbotech, an Israeli maker of chip, circuit board and display panel manufacturing equipment. And last week, Applied Materials (AMAT) announced it's buying Japanese peer Kokusai Electric for $2.2 billion.
3. Optical Component and Module Makers
A major deal in this space -- II-VI's $3.2 billion deal to acquire leading optical component/module supplier Finisar -- is awaiting Chinese regulatory approval. If Chinese approval arrives, it wouldn't be surprising to see additional dealmaking happen.
There has been plenty of consolidation in the optical component market over the last decade, and there arguably still needs to be more, given the market's fragmentation and the pricing power wielded by the cloud giants and hardware OEMs that component vendors service. And in the wake of Cisco Systems' $660-million deal to buy optical component vendor Luxtera and its just-announced deal for Acacia, there could be another deal or two in which an OEM opens its checkbook to obtain technology assets.The market's publicly-traded players include Lumentum ( LITE) , Applied Optoelectronics ( AAOI) , Inphi ( IPHI) and NeoPhotonics ( NPTN) .
This article has been updated to note Cisco Systems' $2.6 billion deal to buy Acacia Communications. Acacia was originally one one of the firms mentioned in the article's final paragraph.