Walden C. Lines, chairman of the company, visited Korea to attend "Mentor Forum 2015," a leading EDA technology event hosted by Mentor Graphics Korea on the 1st. He spoke about the semiconductor M&A surge this year. In his keynote address, Walden presented his outlook on recent semiconductor M&A and R&D investment.

As he stated, this year is likely to be remembered as a "unique year" for semiconductor M&A. While there were 32 semiconductor M&A deals last year, 19 occurred in the first half of this year alone. Even more surprising is the scale of semiconductor M&A investments.

Last year, it was only $23 billion, but in the first half of this year alone, it reached $83 billion, and it is projected to hit a record high of $166 billion this year. Notably, 2015 saw three record-breaking mergers and acquisitions: Intel's acquisition of Altera for $18 trillion, NXP's acquisition of Freescale for $14 trillion, and Avago's acquisition of Broadcom for $41 trillion. For reference, there were 18 cases (USD 10 billion) in 2012 and 16 cases (USD 12 billion) in 2013.

It's true that the global semiconductor market hasn't consolidated, but rather has moved in the opposite direction. Between 1965 and 1972, 29 semiconductor companies emerged, yet the market share of the top companies has remained virtually constant. The combined market share of the top five companies has only increased marginally. The market shares of the top ten companies remain roughly the same, and the market share of the top 50 companies has declined by 10% over the past decade.

It wasn't until 2015 that this long-standing trend saw a real shift. In the first half of 2015, the market share of the top ten semiconductor companies rose 3 percentage points from its peak in 1984.

Chairman Walden summarized the three reasons for this year's surge in semiconductor M&A: economies of scale, low interest rates, and changes in government regulations. First, in terms of economies of scale, foundry sales and the global sales share of fabless companies are steadily increasing.

Looking at the size and profitability of foundries, we see that large companies tend to have higher profitability than smaller companies. However, in the overall semiconductor market, large companies' profitability is not higher. Furthermore, the ability to borrow cash at low interest rates has been cited as a reason for increased cash flow.

This has led to an increase in the size of M&A, but since the 2007 financial crisis, leveraged acquisitions involving debt financing have declined. Finally, changes in government regulations can be seen in the case of China. The Chinese government announced that it will steadily increase its investment in the semiconductor industry by 20% over the next five years, investing $20 billion (22 trillion won) in overseas acquisitions and domestic markets.

Operating costs are decreasing due to mergers and acquisitions, but semiconductor R&D costs continue to increase.

However, Chairman Walden noted that while the company's operating costs have decreased due to mergers and acquisitions in the semiconductor industry, semiconductor R&D costs continue to rise.

"EDA accounts for roughly the same share of the overall semiconductor market, on average, and simulation/verification is absolutely essential. The number of verification engineers continues to grow, and this trend will continue. Having a large number of EDA design engineers does not necessarily equate to an organization's operational efficiency."

He pointed out that if a business is abandoned or R&D investment is reduced through an acquisition or merger, this will immediately create opportunities for other companies. He noted that companies like MediaTek Spreadtrum and Qualcomm are seeing increased profits in markets abandoned by companies like TI, NXP, and Broadcom.

If you reduce R&D investment, it will give opportunities to competing companies.

“The decrease in EDA spending due to semiconductor M&A is not significant enough to be meaningful. “For the past 20 years, we have invested at a constant level based on semiconductor sales.”

The EDA industry is also encouraged by the fact that semiconductor companies are increasing their R&D investments to develop new semiconductor applications. CMOS image sensors used in smart mobile devices are experiencing rapid growth. The IoT, in particular, is creating significant and rapid opportunities for the semiconductor industry. In fact, wearable systems are expected to grow by 36%. The transmission and analysis of this collected data is driving demand for large-scale digital chips.

Chairman Walden cited the following as the impact of semiconductor M&A on R&D: ▲ partial spin-offs after mergers to increase profitability and invest in R&D; ▲ overall investment scale is maintained even if one company reduces investment; ▲ even if engineers move after semiconductor M&A, they end up working in R&D at another company.

"R&D spending will temporarily decrease, but it will remain at a certain level. While the semiconductor M&A trend will continue, it won't last forever."