“Science and Technology Innovation Board Daily”, March 28 (Special Research Fellow Ba Haoyan and Wang Zhi) In recent years, there has been a gradual increase in domestic mergers and acquisitions in the semiconductor sector.

In response, a special researcher on the “Science and Technology Innovation Board Daily” presented an analytical report on the overall situation of mergers and acquisitions, from various dimensions such as transaction scale, title valuation and transaction design, target group, merger and acquisition motivations, and target images. He hoped to help buyers and sellers seize the window period of industry integration, think carefully and seize appropriate mergers and acquisitions opportunities, and achieve win-win development of the industry.

Transaction scale: Semiconductor mergers and acquisitions continue to be active, and the number of transactions has increased significantly since 2022

Since 2021, domestic mergers and acquisitions in the semiconductor sector have continued to be active. In terms of the number of transactions, the number of transactions disclosed each year from 2021 to 2023 remained above 20, and the number of transactions in 2022 and 2023 climbed to about 30, which is related to the decline in popularity of the semiconductor sector in the capital market starting in 2022 and the increase in the listing threshold. In terms of transaction amount, the disclosed transaction amount has stabilized at a high level of more than RMB 20 billion for three consecutive years since 2021.

Target valuation and transaction design: Mainly small and medium-sized transactions, some transactions use differentiated pricing and innovative payment methods

Domestic semiconductor mergers and acquisitions are characterized by being dominated by small and medium-sized transactions. Since 2020, a total of 86 transactions have been disclosed with the underlying valuation, of which 35 transactions have a comprehensive underlying valuation of less than 200 million yuan, accounting for 41%.

For small-scale innovative semiconductor companies, mergers and acquisitions can obtain businesses with long-term development potential at a relatively low cost, and are less difficult to integrate and digest after mergers and acquisitions, so they are favored by many mergers and buyers. For example, through the continuous acquisition of Shanghai Xinshi and Pioneer Microtechnology, Yingtang Intelligent Control quickly achieved a strategic layout from distribution business to the semiconductor design and development field; Huada Jiutian made up for the shortcomings of digital design and wafer manufacturing EDA tools through the acquisition of Xinda Technology.

In terms of price consideration design, some transactions use a differentiated valuation and pricing strategy to achieve a balance of shareholders' interests in different backgrounds and rounds; in terms of payment methods, some transactions also innovatively use various complex payment methods other than cash to reduce the buyer's financial pressure while achieving deep binding to the target's core management team.

Taking the transaction of Syrups to acquire Chuangxinwei as an example, the target Chuangxinwei's comprehensive valuation was 1.06 billion yuan. Among them, Chuangxin's valuation corresponding to the transaction consideration received by the management team, early individual investors, and the remaining investors in each round was 870 million yuan, 1.15 billion yuan, and 1.62 billion yuan, respectively. The transaction plan with differentiated valuation pricing takes into account differences in investment time and investment costs of different shareholders, and can facilitate the transaction to the greatest extent.

The strategy of differentiated pricing is also widely used by merger and acquisition exchanges in other industries, such as Goertek's acquisition of Yuguang Technology.

In addition, the target payment method for shareholders of the Chuangxin Micro management team is convertible bonds+cash, and all other investors withdraw in cash. The introduction of convertible bonds can effectively avoid direct cash withdrawals by management, and also provides a more flexible mechanism for both parties to the transaction. It is worth noting that Chuangxinwei was still at a loss from January to September 2023, but the total promised net profit for 2024-2026 reached 220 million yuan, with an average annual net profit of 73.33 million yuan corresponding to the P/E of this transaction. This relatively aggressive performance promise also further controlled transaction risks.

Target group:

In past semiconductor transactions, the target industry was mainly concentrated in the two major segments of midstream design and upstream support (EDA/IP tools, equipment, materials), accounting for 60% in total. Compared with 2020 and 2021, there has been a significant increase in acquisitions of semiconductor upstream support links and manufacturing and testing since 2022. The target industry's share of tools/materials/equipment transactions rose from 24% to 32%, and the target industry's share of packing/fabs increased from 15% to 25%.

It can be seen from this that mergers and acquisitions in the semiconductor field are gradually expanding into upstream support links, wafer manufacturing, sealing and testing, etc., and more targets with unique competitive advantages are being discovered in the segmentation process, and mergers and acquisitions in the semiconductor field are showing a deepening trend.

In 2020 and 2021, the main business of the midstream design segment was quite diverse. The main products involved analog chips, SoC, memory chips, MCU, ASIC, etc., and in transactions since 2022, there was a significant increase in the number of targets in the analog chip segment. There were 14 cases, accounting for 64% of midstream design transactions during the same period. Representative transactions include Sirisu's acquisition of Chuangxin Micro and Nanocom's acquisition of Quantum Micro.

In the midstream semiconductor design process, the two major segments of analog chips and memory chips have shown significant potential for mergers and acquisitions. Analog chips will continue to be a popular field for semiconductor mergers and acquisitions due to their characteristics such as a wide variety of products, long life cycles, and a wide range of downstream applications. Through mergers and acquisitions of analog chip companies, it is possible to quickly expand product lines and enrich technical reserves. In the current market environment, the combination of factors such as price wars and pressure on manufacturers to remove inventory has further encouraged analog chip manufacturers to seek integration to meet market challenges.

Memory chips are the second largest sub-industry in the semiconductor industry, and technical and financial barriers are high. As new technologies and processes in the storage field continue to evolve rapidly, and demand for high-speed, high-capacity memory chips continues to grow, manufacturers are expected to upgrade technology through mergers and acquisitions and seize development opportunities in the storage market.

Compared to 2020 and 2021, the number of transactions involving EDA/IP tools, equipment, and materials in the target industry has increased in the number of transactions involving EDA/IP tools, equipment, and materials from 2022 to now. Representative transactions include Gilun Electronics's acquisition of Xinzhilian, Robert Coke's acquisition of Ficontec, and Jacques Technology's acquisition of SKC-ENF.

In the long run, EDA will be a key direction for mergers and acquisitions expansion. The R&D threshold for EDA tools is high, and mergers and acquisitions have always been an important strategic means for leading EDA manufacturers to build full-process platforms. Through mergers and acquisitions, it is possible to effectively expand the EDA tool portfolio, install and integrate more technologies, and form complete solution capabilities. The main difficulty lies in the collaboration between the different EDA point tools acquired.

The target industry is a sharp increase in the number of transactions for manufacturing sealed tests. Representative transactions include TCL Zhonghuan's acquisition of Xinxin Semiconductor and Jingneng Microelectronics's acquisition of Yizhong Packaging. In the future, during the manufacturing sealing and testing process, mergers and acquisitions in the field of advanced production capacity will maintain a high trend. Currently, low-end production capacity for domestic wafer manufacturing and semiconductor packaging and testing is beginning to tend to be excessive, and value continues to decline over the long term. However, advanced production capacity is a key winning method to seize the market and gain an opportunity. Through mergers and acquisitions, strategic resources are replanned and distributed, thereby rapidly expanding advanced production capacity, which is a necessary measure for relevant manufacturers to achieve sustainable development under the current situation.

Merger and acquisition drivers:

Horizontal mergers and acquisitions, vertical mergers and acquisitions, and unrelated diversification have been the main drivers of domestic semiconductor mergers and acquisitions since 2020, accounting for 45%, 21%, and 20%, respectively.

Compared with 2020 and 2021, the share of horizontal mergers and acquisitions has risen to half since 2022. The segments mainly include analog chips, EDA, materials, etc. Among them, horizontal mergers and acquisitions in the field of analog chips and materials are mainly aimed at diversifying product types and expanding market share. For example, Sirip is expanding its product layout and downstream fields through the acquisition of Chuangxin Micro and moving towards a comprehensive analog chip manufacturer.

Horizontal mergers and acquisitions in the EDA field are mainly driven by filling up technical shortcomings. For example, Gailun Electronics made up for gaps in board-level and package-level design through the acquisition of Xinzhilian, and enriched the EDA ecological layout.

The proportion of vertical mergers and acquisitions transactions has risen from 17% in 2020-2021 to 23% from 2022 to now. More and more semiconductor industry players have achieved an extended layout upstream and downstream of the industrial chain through mergers and acquisitions, mainly including expanding manufacturing and sealing and testing links. For example, Jiang Bolong added businesses such as memory chip packaging testing to Suzhou through acquisitions; IDM manufacturers such as Yangjie Technology improved chip size and production capacity through mergers and acquisitions of fabs.

An unrelated diversified transaction refers to a cross-border merger and acquisition of semiconductor targets by buyers in traditional industries such as construction and clothing. The share of such transactions fell from 32% in 2020-2021 to 13% in 2022 to the present. As the semiconductor industry begins a downward cycle in 2022, the valuation of semiconductor companies in the capital market gradually returns to rationality. The enthusiasm of companies in other traditional industries to deploy semiconductors across borders through mergers and acquisitions has declined markedly. Buyers entering the semiconductor industry with short-term benefits are difficult to obtain expected returns. Buyers are generally more cautious and rational, and are beginning to gradually converge into the semiconductor and related industries, and regulators will step up their scrutiny of cross-border acquisitions in such weakly related fields.

Related diversified transactions refer to technology industry buyers with a certain degree of correlation with the semiconductor industry, and mergers and acquisitions of semiconductor targets. Since 2022, the share of such transactions has risen to 11%. Industrial buyers in the fields of electronics, optics, equipment manufacturing, etc. have also opened up a second growth curve through acquisitions in the semiconductor sector.

When merging and acquiring semiconductor companies, such industrial buyers can use the experience and resources accumulated in existing business fields to a certain extent, and can achieve rapid expansion of the business scope and linkage of the industrial chain through continuous mergers and acquisitions. Related diversified transactions will also play an increasingly important role in the semiconductor M&A market due to their role in promoting the integrated development of the technology industry.

Starting from the deep logic of industrial integration and development, listed companies or industrial groups within the semiconductor industry will continue to be important initiators and leaders of mergers and acquisitions transactions. In the rapid development of the past few years, domestic listed semiconductor companies and industrial groups have accumulated deep technical barriers and extensive market resources in the business field. Industry adjustments have also brought them a window to deepen their industrial layout. The policy level has also clearly proposed support for mergers, acquisitions and restructuring of technology-based enterprises. Driven by strong business development demands, such companies are expected to achieve a leap forward in competitiveness through mergers and acquisitions with “big eats small” as the main model.

Furthermore, forward-looking and strategic emerging industries are the core driving force for optimizing the layout of state-owned capital. Central state-owned enterprises are expected to focus more resources on cutting-edge scientific and technological innovation fields by implementing mergers, acquisitions and restructuring in the semiconductor field, with the impetus of favorable policies, to inject vitality into long-term development and drive the continuous high-quality development of the industry and industrial chain upgrading.

Target image

There are three main categories of images of suitable semiconductor mergers and acquisitions:

The first category is targets that are smaller in size and have outstanding technical or product advantages in a certain segment. Such targets are often limited by the ceiling on the scale of the business, and are even in a state of loss. Their ability to withstand risks is weak, and they may face survival problems in the face of industrial cycle adjustments and financing obstructions. However, its unique advantages in the field of segmentation can bring a certain synergetic value to the merger and purchaser. After being merged and acquired, the business can be rapidly expanded and scaled up with the power of suitable buyers.

The second category is for targets where the IPO listing has failed or is still in the IPO process but the listing prospects are not optimistic. In recent years, although semiconductor companies have sought to be listed on A-shares, some semiconductor companies are still facing various challenges in IPO listings, and listing applications have even been terminated due to compliance issues. These types of companies generally have a certain size and are doing well. However, on the one hand, IPOs are becoming more difficult, and uncertainty is getting higher. On the other hand, capital market valuations are shrinking, and it is difficult for less scarce companies to obtain the expected market value even after going public, so such companies are also beginning to consider opportunities to be merged and acquired.

For example, in Nanochip's transaction to acquire Quantum Micro, the target Quantum Micro tried to go public twice, and was in the process of filing a second IPO when the merger and acquisition transaction was first disclosed. However, in the end, Quantum Micro chose to voluntarily withdraw its listing application and instead seek to achieve development goals through mergers and acquisitions.

For potential mergers and buyers, such targets have gone through a relatively systematic and complete business and financial review during the IPO application process, and potential risks have also been relatively fully revealed. The costs of engagement and due diligence are low. Among them, companies with stable development and good technical resources can bring long-term collaborative value to industrial buyers through mergers and acquisitions. The phased slowdown in A-share IPOs brought about by the recent countercyclical adjustment of new stock issuance is expected to accelerate the flow of high-quality semiconductor companies into the M&A market and further free up space for industry integration.

The third category is assets owned by overseas companies. Many overseas semiconductor companies set up subsidiaries with different business directions in different regions to achieve a global diversified business layout. When making strategic adjustments and divesting non-core assets, it can spawn opportunities for their subsidiaries to be merged and acquired. Relying on the technical and resource support of group companies, these subsidiaries have generally entered a mature stage of business development. After being merged and acquired, they can directly help buyers expand scale, enhance performance, or expand global layout.

Among them, for overseas targets, you can refer to the opinions of the transaction advisory team during mergers and acquisitions to fully assess the impact of geopolitical factors on their customer stability and business sustainability, and focus on the expansion of their Chinese business during the integration phase to reduce the sustainability risk of overseas business.

Deal design

At the level of plan design, it is necessary to carry out personalized customization in terms of transaction rhythm, valuation system, differentiated consideration design, payment method selection, and performance commitment arrangements based on full consideration of the actual situation of the transaction and the demands of each participant.

In terms of transaction pace, it is possible to consider a step-by-step acquisition method. First, participate in shares appropriately, pay close attention to the target business situation and strategic trends, and then invest additional investment to achieve a holding acquisition, thereby effectively controlling the risk of mergers and acquisitions. In the “join first, then merge” approach, M&A funds with industry resources will play an important role to effectively tap potential targets for mergers and acquisitions and help them form a synergy with industry buyers, thereby promoting the occurrence of more high-quality M&A transactions.

In terms of the valuation system, due to significant differences in the strategic perspectives and goals of mergers and acquisitions and financing transactions, and the variability of the market environment may cause drastic changes in the valuation logic, it is necessary to adjust valuation expectations and methods in a timely and flexible manner according to market conditions to avoid looking at the company's value from a historical perspective.

In terms of consideration design, the core demands of all parties involved in the transaction should be thoroughly analyzed, and differentiated consideration should be designed for different participants based on factors such as the target shareholders' role positioning, investment time and cost, and whether they will continue to participate in the target's management in the future. Since the pricing plan involves a game of core interests between multiple parties, buyers and sellers are required to be patient enough to negotiate a win-win plan for all parties.

In terms of payment methods, in addition to common cash payments, payment instruments such as shares and convertible bonds can also be appropriately introduced to achieve long-term deep incentives for the target company's core team and share development results. For listed companies, the shares of a subsidiary can be used as a payment method, which is more flexible than the direct issuance of shares by a listed company for acquisition. If the subsidiary is successfully listed independently in the future, the shares held by the merger and acquisition seller will also have circulation value, which can further enhance the attractiveness and potential return of the merger and acquisition transaction.

In terms of performance commitments, mergers and acquisitions parties should carefully assess the potential risks of the transaction, fully consider cycle fluctuations in the semiconductor industry, set reasonable commitment periods and performance indicators, and avoid blind optimism. In addition, it is possible to consider achieving effective incentives for targets through excessive performance rewards or subsequent acquisition promises, etc., and reserve a certain amount of flexible space to better balance transaction risks and benefits on the premise of guaranteeing transaction results.

Finally, since the target supply exceeds the buyer's acquisition demand, the current domestic semiconductor merger and acquisition market is essentially still the buyer's market. Rational founders and investors and shareholders should start from a long-term strategic perspective, carefully consider and seize appropriate mergers and acquisitions opportunities, seize the window of industry integration, and add bricks and tiles to the development of the industry while achieving their own returns.

(Author Ba Haoyan is an employee of Huaxing Capital, and Wang Zhi is an employee of Shanghai Weihao Chuangxin Investment)