Why did semiconductors set off a wave of investment and mergers and acquisitions under the epidemic?

Huge waves of investment sweep the world

In 2020, despite the impact of the epidemic, the entire capital market suffered a "cold winter", but the semiconductor venture capital field is unprecedented. China is also the main force in this wave of investment. In 2020, there were nearly 400 equity investment cases in the IC sector, with a total investment amount of more than 140 billion yuan, reaching more than three times the total financing in 2019.

In 2021, this wave of investment has only increased, and in less than five months, the total amount of financing has approached the total amount for the whole year of 2019.

The epidemic has not stopped the enthusiasm of domestic capital markets for semiconductor investment. On the one hand, the establishment of Science and Technology Innovation Board has provided more funds with better investment exit channels, and the prosperity of the secondary market has led to the enthusiasm of the primary market. On the other hand, industrial investment funds represented by Yuanhe Puhua, Xiaomi production Investment, Huawei Hubble, SMIC Juyuan, etc., and front-line investment institutions represented by Sequoia Capital, Hillhouse Venture Capital, Matrix Partners China and Yida Capital have entered the bureau one after another, which also contributed to the outbreak of the semiconductor investment and financing market in 2020.

In addition, driven by the national strategy, market environment, domestic alternative opportunities and other major trends, domestic semiconductor investment has been inspired by new vitality.

International mergers and acquisitions hit a new high

In 2015, the last big year for mergers and acquisitions in the semiconductor industry, $107.7 billion was worth more than in the previous seven years combined, when chip companies responded to slowing revenue growth and rising costs. After several years of wandering, the tide of integration and mergers and acquisitions in the semiconductor industry has also hit again.

In the second half of 2020, this huge wave of mergers and acquisitions officially opened. In July, ADI (Yadno Semiconductor acquired Maxim (American Credit) for $21 billion. In September, Nvidia announced the acquisition of ARM for $40 billion. In October, SK Hynix bought Intel's NAND flash chip business for $9 billion, and AMD bought FPGA supplier Xilinx (Selinz), Marvell (Mellon) for $35 billion for Inphi, an analog chip maker for optical communications and data interconnection, for $10 billion. Five deals in just three months set a new record for mergers and acquisitions in semiconductor history.

The whole technology industry has entered a new period of explosive growth, and large-scale mergers and acquisitions are mainly planning for a comprehensive digital world. The epidemic has played a catalytic role in the digital transformation, and the booming performance of the semiconductor sector in the US stock market last year has also become an important driver of large-scale mergers and acquisitions in the industry. Last year's strong performance in the field of semiconductor mergers and acquisitions may lead to the start of a new round of mergers and acquisitions. According to some institutions, half of the 75 chip-listed companies currently listed in US stocks may merge in the next few years.

The giants all look forward to the effect that 1: 1 is greater than 2. Through mergers and acquisitions, financial indicators can be more optimized. Based on the complementarity and coordination at the business level, the product line and user base can be expanded, and a stronger supply chain premium can be achieved. At the same time, reduce costs. However, the integration after M & An is no small challenge for any M & A transaction. In the past, many companies have paid a huge price for their acquisitions. For example, AMD announced the acquisition of ATI in 2006, which made it nearly bankrupt.

The stronger the stronger, the weaker the weaker.

Under the catalysis of the epidemic situation of novel coronavirus, the Matthew effect highlights, that is, the polarization phenomenon of the strong is stronger and the weak is weaker.

From December 2018 to May 2020, the annual implied economic profits of the top 1/5 of US listed companies increased by $335 billion, while the bottom 1/5 lost $303 billion, according to a McKinsey report. From an industry perspective, the implied economic profits of the six most profitable industries increased by $275 billion, while the next six industries lost $373 billion. Among the six most profitable industries, the semiconductor industry ranks first.

The same is true in China. According to statistics, the total revenue growth rate of domestic A-share semiconductor listed companies is 41.41%, ranking first among all sectors, and net profit growth rate is 95.01%, ranking third.

Matthew effect in the industry also began to appear, when the financial data of listed companies frequently reported success, the market about the closure of small and medium-sized enterprises is also incessant. Due to the increasing cost pressure, the decline of industry profits, the deterioration of the foreign trade market and the epidemic situation of novel coronavirus, small and medium-sized enterprises have suffered a huge negative impact. Many companies have failed to reverse their business difficulties and are difficult to sustain, and the tide of closure is also coming quietly.

The semiconductor industry has the obvious characteristic of "winner takes all", small and medium-sized enterprises are trying to survive in the gap. In the overall depressed market environment and capacity shortage, large companies are also competing for limited capacity, while small companies often have no bargaining power and can only be slaughtered.

The undercurrent of the game between China and the United States is surging.

While the world is grappling with capacity shortages in the semiconductor industry, a new wave of semiconductor start-ups has been quietly gathering large amounts of venture capital to develop next-generation chips, particularly in China and the US.

Global venture capital investment in semiconductor companies set a record quarterly transaction volume of $2.64 billion in the first three months of 2021, with 70 per cent of that going to Chinese companies, according to PitchBook. During this period, American enterprises also received a considerable amount of investment.

In order to promote the development of China's integrated circuit industry, China's National Integrated Circuit Industry Investment Fund raised a total of about 50 billion US dollars in two phases. Over the past six years, China has been stepping up its efforts to use fiscal incentives, intellectual property (IP) and antitrust standards to accelerate the development of its domestic semiconductor industry, reduce its dependence on the United States, and establish itself as a global technology leader.

Last month, the Biden administration unveiled a $2,000bn infrastructure investment plan, which also involves $50 billion in chip supply chains, designed to compete with China in technology.

Despite China's huge investment, it is almost impossible to have independent semiconductor manufacturing capacity in the next five to 10 years. China's self-sufficiency rate in core chips is less than 3%, and the gap between advanced processes is still large. Take SMIC and Intel as an example, SMIC's 14nm process revenue accounted for less than 10% of its revenue in 2020. Intel 10nm process has already been mass-produced, and SMIC's business income is only 5.01% of Intel's, and the R & D cost is 4.99% of Intel's.

Not only that, there is also a huge gap in volume between Chinese and American semiconductor companies. Comparing the top 20 semiconductor companies in the Chinese and US stock markets, it is found that the total market capitalization of US stock market companies is 10.2 times that of A-shares, the total operating income is 10.6 times that of A-shares, and the total R & D cost is 20.0 times that of A-shares.

Going to the era of Semiconductor 2.0

The catalysis of the Sino-US trade war, the promotion of Science and Technology Innovation Board, and the impact of novel coronavirus's epidemic situation have made China's semiconductor industry enter the 2.0 era. In the 2.0 era of semiconductor industry, there are both opportunities and crises. But it is undeniable that this has opened a golden decade for Chinese semiconductors.