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The semiconductor industry has been hit by a “perfect storm” — an ecosystem shocked by skyrocketing chip demand and supply chain issues all at once. Leaders in the semiconductor industry understand that to stay competitive with new resources and capabilities, they must find innovative ways to take advantage of those unique opportunities.
For semiconductor businesses, mergers and acquisitions have been a traditional method of growth. Increased regulatory scrutiny and fewer large semiconductor acquisition targets, however, have created a need for chipmakers to learn how to maximize their value from smaller transactions.
Smaller Deals are on the Rise
Between 2017 and 2020, large blockbuster deals over $1 billion increased annually as a proportion of total merger and acquisition (M&A) transactions from 2% in 2017 to 8% in 2020. However, over the past year and a half, regulatory, economic, and geopolitical shifts have had a clear impact on the market. Starting in 2021, this trend reversed and for the first time since 2017, the proportion of large deals over $1 billion decreased, shifting back to 5% of overall M&A transactions, according to Accenture Strategy’s analysis of S&P Capital IQ data.
For management teams used to executing large deals, adjusting to smaller, more frequent deals comes with a new set of challenges. Instead of closing a $10 billion deal, leaders now need to learn how to plan, prepare, and close several $1 billion deals just as efficiently.
While this is certainly a challenge, there are also significant advantages to conducting this strategic pivot. Executing more frequent transactions gives deal teams opportunities to experiment and gain experience screening targets, analyzing deal theses, and identifying operational improvements. Frequent small deals also reduce risk by diversifying M&A investments across a portfolio of transactions.
Rationale for Smaller Deals
The key to navigating successful M&A through smaller deals is learning to extract value from these smaller transactions by maximizing integration efficiency and deal profitability. According to Accenture research, this can be achieved by considering these three over–arching deal rationales:
Technology Advantage — how firms race toward the next generation of inputs (e.g., chips, batteries, etc.) so they can deliver the next generation of outputs (e.g., cars, devices, etc.). If technology advantage is the driving factor for a deal, acquirers must ensure their pre–close planning defines how the new tech stack will complement existing functions or run as a new entity.
The fundamental rule to keep in mind here is “don’t disrupt what’s working today.” To that end, it is critical to preserve existing sales channels as well as the brand capital that both parent company and target company have developed over time.
Product and Process Evolution — how firms transform the way they work; typically to optimize their operations (e.g., increase scale, decrease costs, etc.). Semiconductor companies are transforming the way they work (a short–term play) by using M&A to acquire physical assets that can help them optimize their operations to become more competitive. This includes both internal processes such as performance management and salesperson incentives, as well as structural operations such as real estate footprint and digital marketplaces.
For example, similar to many other high–tech firms, semiconductor companies are moving away from selling widgets (chips) to selling software–as–a–service. This requires new sales capabilities and tools. M&A can also help companies strengthen their supply chains and could involve the purchase of fabs to secure production capacity.
People Infusion — how firms leverage transactions to bolster their human capital potential (e.g., hiring entrepreneurial founders, niche experts, and innovative talent). Acquiring the right talent can deepen industry knowledge, help transform a brand, and improve overall collaboration. That is why it’s important to establish a talent strategy early in the deal lifecycle. Talent needs to come to the forefront in M&A integration.
Regardless of the deal thesis, the priority for companies should be to avoid culture shock and minimize attrition. If an acquiring company is buying a target for its people, the last thing they want to see is that talent leaving. To avoid this, firms must have a tailored plan to integrate culture and maintain momentum throughout the integration execution timeline.
This should include vesting incentives that are aligned with the company’s transformation goals and providing autonomy to the target company leadership. It’s also helpful to use a fit–for purpose approach when acquiring talent and proactively gauge how well the target company aligns with current culture at the acquiring firm.
The Leaders of Tomorrow
The winners in today’s new and changing semiconductor landscape will be leaders who can build M&A strength through disciplined divestitures and acquisitions, all while maintaining a clear vision of the future.
Any company can make an acquisition, but in order to be successful, it is critical to ensure M&A teams are diligent and maintain perspective of their overall growth strategy.