Microchip beats out Dialog to buy Atmel in IoT consolidation

Consolidation will be a running theme in the IoT for many years to come, and the past year has been full of strategic mergers and acquisitions – especially in the silicon industry. One of the largest potential mergers in the space has now been confirmed, with Microchip successfully outbidding Dialog Semiconductor to acquire Atmel for around $3.5bn.

Dialog was the first bidder, but Atmel later released a statement that it had received a superior offer. After the holiday break, it transpired that this bidder was Microchip, with a $7 cash and $1.15 in Microchip stock per Atmel share. The deal is expected to close in Q2 2015.

After the identity was confirmed, shares in both Microchip and Atmel rose – which is fairly unusual in most M&A announcements. Dialog’s share price, however, dipped some 40% since the announcement was made back in September – peaking a little after Microchip was announced but now sitting at $26.5, and well down from a peak of $52 back in June.

Dialog’s market cap sits at around $2.3bn, with Atmel at around $3.34bn, and Microchip a lot bigger at some $8.32bn.  This deal follows the monster acquisition of Broadcom by Avago, which will create a new combined $77bn business, and Intel’s $16.7bn acquisition of Altera and Lantiq (for an undisclosed sum). With the addition of a number of smaller acquisitions, we can see that the silicon industry is rather swiftly consolidating – and the IoT will provide even more impetus for silicon designers and manufacturers to grow larger, in order to meet the scale of the opportunity and enjoy the economies of scale available in new markets.

With Microchip and Atmel, the two portfolios strongly overlap in microcontrollers. The small processors, predominantly ARM designs, are a key IoT technology, as they provide the computational power required for all manner of small devices in a low-power and low-cost package. Most microcontrollers also take up a small design footprint, which also helps keep the size of the device small. These sorts of performance metrics aren’t possible using the much larger ARM-based mobile processors.

“Microchip and Atmel have a strong tradition of innovation, stretching across microcontroller, analog, touch, connectivity and memory solutions. Joining forces and combining our product portfolios will offer our customers a richer set of solution options to enable innovative and competitive products for the markets they serve,” said Ganesh Moorthy, COO of Microchip.

The pair expect to create around $170m in synergies by meshing the two businesses together, beginning in 2018. Microchip has also announced that it will increase its share buyback program to 15m from the current 11.4m shares that remain from its previous repurchase plan – a sign that the company wishes to gain more control over its operations and be less subject to potential external influences.

“We are delighted to welcome Atmel employees to Microchip and look forward to closing the transaction and working together to realize the benefits of a combined team pursuing a unified strategy. As the semiconductor industry consolidates, Microchip continues to execute a highly successful consolidation strategy with a string of acquisitions that have helped to double our revenue growth rate compared to our organic revenue growth rate over the last few years. The Atmel acquisition is the latest chapter of our growth strategy and will add further operational and customer scale to Microchip,” said Steve Sanghi, CEO of Microchip.

Consolidation of this sort will be a common pattern in the IoT, although perhaps not at this skill. Where new competitive niches or verticals appear, the smaller entrants will likely absorb each other, or be acquired by a larger entity looking to expand or control more of the supply chain. RIoT believes that the most compelling IoT offerings will be platforms that incorporate some aspect of hardware and software, which can be sold to businesses as services – allowing a business to effectively transform an established business practice into a more efficient or profitable one using IoT technology.

Also this week, Bloomberg is reporting that both Analog Devices and Texas Instruments passed on the opportunity to acquire Maxim – another silicon vendor that appears eager to merge itself into a larger business, for fear of being squeezed out.

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