Contact: Scott Denne
Semiconductor deals keep getting bigger as the industry consolidates and the startups vanish. More buyers are looking for big targets where they can make significant cuts to operating expenses, rather than young companies that can bring them new products or revenue growth – largely because such young companies no longer exist. Avago Technologies’ $6.6bn purchase of LSI is a prime example.
Avago obtains a business that, last quarter, saw revenue decline 3% year over year to $607m but has better margins than Avago’s, something the acquirer plans to improve further by cutting $200m in annual operating costs out of the combined company in the second year following the deal’s close. At an enterprise value of $5.94bn, the transaction values LSI at 2.5x trailing 12-month revenue, higher than the 1.8x median multiple this year for vendors in its market.
Until the past few years, semiconductor suppliers had a pool of startups that could provide them with revenue growth (or at least the potential for growth with new products). Venture capitalists, however, have abandoned that space as the costs of building a chipmaker have soared and public market multiples for those businesses have stagnated. For the most part, chip startups are now extinct, and that’s unlikely to change anytime soon as almost all venture firms have refocused or eliminated partners that formerly specialized in chips.
That has led to an inverse relationship between the value and volume of deals in this sector: the median size of semiconductor purchases has been rising as the total number of such transactions has fallen. This year, the median price paid for a semiconductor provider rose to $75m, higher than it’s been in a decade and up from 2012 ($54m) and 2011 ($39m), according to The 451 M&A KnowledgeBase.
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