LONDON -- Anticipating the spread of the Internet of Things, chipmakers around the world are reorganizing. The number of corporate mergers and acquisitions in the industry this year is nearing the all-time high set in the year 2000 at the height of the IT bubble. With the boost in earnings growth from the market penetration of smartphones approaching its end, chipmakers are undertaking strategic moves to refocus growth on the Internet of Things as a new market.
U.S. research firm IC Insights reports that M&A in the semiconductor industry between January and late September this year have been worth a total of $77 billion, roughly six times the annual average over the previous five years. A new wave of M&A seems to be building to rival that of 2000, when total value topped $100 billion. The latest major agreement, in which Dialog Semiconductor of the UK will take over Atmel of the U.S., is worth $4.6 billion.
Chipmakers are under pressure to reorganize as the industry approaches a pivotal moment. The accounting firm PricewaterhouseCoopers projects that world chip demand will increase to $432 billion in 2019, up 30% from 2014, largely due to estimated annual demand growth of nearly 10% in the Internet of Things sector, including industrial and automotive applications. The growing popularity of wearable devices will also contribute to demand for chips.
To grow in the Internet of things field, many chipmakers are aggressively seeking M&A targets with complementary technologies. Earlier this year, Avago Technologies of the U.S. agreed to take over Broadcom of the U.S. for $37 billion. NXP Semiconductors of the Netherlands recently announced that it will take over Freescale Semiconductor of the U.S. A string of upcoming deals will likely shift the industry's top 10 ranking.
As the larger companies consolidate, midsize firms are increasingly apprehensive. Seeing the Internet of Things as the road to continuing growth, Dialog Semiconductor, whose main business is power-source control for smartphones and similar devices, decided to take over Atmel, which is strong in the microcomputer and automobile sectors. Until now, Dialog Semiconductor has grown with the market penetration of smartphones, but since it depends on Apple of the U.S. for 70% of its earnings, it has had to diversify and hedge risk. Atmel was once a target of Cypress Semiconductor of the U.S., which made a bid but did not go further.
The takeover competition is only intensifying. Barclays Capital analyst Andrew Gardiner says that with the chip industry under widespread reorganization, good takeover prospects are getting harder to find.
Last year Dialog Semiconductor opened talks with AMS of Austria on management integration, but that ended in failure. Meanwhile, AMS acquired the CMOS, or complementary metal-oxide semiconductor, sensor division of NXP in July.
Though it holds over 90% of the smartphone chip-design market, ARM Holdings of the UK is pushing to be more compatible with Internet of Things products to capture the growth potential it sees in the field of security, which will be essential to the proliferation of interconnected goods. In July it won agreement to take over Sansa Security, an Israeli firm strong in coding technology. With this acquisition, ARM Holdings hopes to alleviate its heavy dependence on smartphones.
As increasing M&A activity leaves fewer available prospects, acquisition prices are going up. The key to better synergy with acquired firms will be good strategies for taking leadership in the Internet of Things market.