Hostility stalks the semiconductor industry

by Jeff Dorsch, September 23rd, 2008, 7:00 am

Hostile takeovers have never been common in the high-tech industry, but they’ve become more frequent since Oracle was able to roll up PeopleSoft in 2005.

The semiconductor business now is witnessing two hostile takeover bids. You may have seen that Samsung Electronics is targeting SanDisk; more on the other one below.

As others have noted, hostile takeovers in technology are uncommon because so much of the business is dependent on the human talent, which can vote with its feet at any time. You can buy a company and possess its physical assets, such as office buildings and wafer fabrication facilities, but your chip design engineers are free agents who can pick up and leave for greener pastures, along with any executives and middle managers without employment contracts. In the US, most employment is “at will” and can be terminated by the employer or the employee whenever they choose.

This year has seen a couple of unsolicited acquisition bids flame out for various reasons. Microsoft was unable to come to terms with Yahoo!, even after increasing its offer. Electronic Arts this month finally gave up on pursuing Take-Two Interactive Software. Elsewhere, United Technologies officially still has an offer out there to buy Diebold, but UTC chairman George David recently told analysts that his company is less likely to purchase the ATM maker, a prospect Diebold rejected.

Samsung Electronics hasn’t previously pursued a hostile takeover of an American company; it rarely makes any acquisitions, period. The memory chip giant, which also provides a variety of consumer electronics products and home appliances, was in talks for more than three months on a possible combination with SanDisk, which makes portable data storage drives, music/video players, and other products based on flash memory devices. The two companies were also wrapped up in negotiations over patent licensing that have dragged on for more than a year.

Samsung’s cash offer to buy SanDisk, worth nearly $6B, sounds like a lot of money, but SanDisk would have commanded a much bigger price in 2006 and 2007, or even four months ago. In rejecting Samsung’s bid, SanDisk suggested that Samsung’s acquisition offer is just a negotiating ploy in the licensing talks.

Toshiba may emerge as SanDisk’s white knight in this drama. The electronics behemoth enjoys a close manufacturing partnership with SanDisk (the companies share production of flash memories from four wafer fabs in Japan, and they plan to build a fifth fab together), and Toshiba Semiconductor is the world’s second largest supplier of NAND flash memory, the chips that store data in MP3 players, wireless phones, and other popular electronics products. (Samsung is number one in that market.)

Seagate Technology is also being mentioned as another potential savior, possibly because the combination of SanDisk with Samsung or Toshiba could set off antitrust alarms around the world, but CEO Bill Watkins said he wasn’t interested in buying SanDisk.

Meanwhile, there’s another hostile bid going on in the semiconductor industry that’s getting a lot less attention in the blogosphere and the mainstream media. Vishay Intertechnology wants to buy International Rectifier (IR) for almost $2B. Who? What? These two companies, while decidedly obscure to consumers, make electronic components that likely are in any electronics you own. They are big suppliers of passive electronic devices, which regulate electrical power, store electricity, and perform other important electronic system functions in cars, computers, phones, and many other products.

Vishay made its bid for IR shortly after TDK agreed to buy EPCOS, the world’s second largest manufacturer of passive electronic components. TDK may be famous for blank cassette tapes and computer disks (all of which are actually marketed by Imation now), but its sales are dominated by electronic materials and components, and Vishay doesn’t want to get left in the dust by the EPCOS-TDK combination and their mutual competitor, Murata Manufacturing.

No one can accurately predict how these bids will unfold, so stay tuned.