The trend toward specialization rather than expansion through acquisitions and sales
There will be no consolidation into a small number of semiconductor giants.

While it's true that semiconductor company acquisitions have increased dramatically since 2015, the direction of these acquisitions isn't necessarily toward consolidation.

At the Mentor Graphics meeting held at the Lotte Hotel in Jamsil on the 31st, Walden C. Lines, Chairman, spoke about the global semiconductor market trends as follows.

Mark Edelstone, managing director at Morgan Stanley Investment Management, predicted that “within five years, half of all pure-play semiconductor companies will be acquired, and the market share of the top three suppliers is likely to double from about 30% today over the next decade.”

Chairman Walden stated, "The recent structural changes taking place in the semiconductor industry are not about consolidation for scale, but rather about specialization. While companies that have recently specialized through acquisitions and divestitures have generally seen increased operating profit margins, the growth rate has not been rapid." He added that consolidation into a small number of semiconductor giants is unlikely.

In fact, the typical number of mergers and acquisitions announced in the semiconductor industry over the past several years, from 2010 to 2015, reached 23, with the total value of M&A activity reaching $116 billion in 2016. For example, Intel, the largest semiconductor company, has aggressively acquired companies like Wind River and Altera. However, its market share has remained the same as before the acquisitions.

TSMC has grown its market share, but there has been no acquisition activity along the way. Among the top five groups, only Broadcom/Avago saw its market share increase largely due to acquisitions.

“This shows that the industry is maturing,” said Chairman Walden, explaining that the signs include: market saturation approaching and sales growth slowing; demand for new products decreasing; product differentiation being overtaken by commoditization; prices stabilizing while there are cost-cutting efforts; and companies’ profits increasing through efficiency efforts such as labor cost reductions, improved efficiency and automation, and mergers for economies of scale.

Although operating expenses, including R&D and marketing expenses, have decreased through acquisitions, the company stated that R&D as a percentage of sales has remained constant at 14% for 35 years. While some businesses in the semiconductor industry, such as the DRAM and HDD markets, are meeting the expected trend, the company noted that the ongoing consolidation in the industry is due to a familiarity with "deconsolidation," and mergers and acquisitions are leading to a degree of consolidation among the top 10 semiconductor companies.

He said, "Actually, acquisitions in the semiconductor industry are aimed at improving operating profit, not at achieving economies of scale. This year, acquisitions will decline."