Starting from the second half of 2023, the domestic chip industry mergers and acquisitions have been a hot topic, and it feels that mergers and acquisitions are coming.

Corporate mergers and acquisitions include two meanings and two methods: mergers and acquisitions. Internationally, mergers and acquisitions are used together, collectively referred to as M&A, and in my country, they are called mergers and acquisitions. That is, mergers and acquisitions between companies are the behavior of corporate legal persons acquiring other legal person property rights in a certain economic way on the basis of equality, voluntariness, and equal compensation. It is a major form of capital operation and management for enterprises. Corporate mergers and acquisitions mainly include three forms: company mergers, asset acquisitions, and equity acquisitions.

Among the cases of mergers in the domestic chip industry, the merger of Spreadtrum and RDA is the most influential and the most worthy of deep thought. At the moment when the market involution and the capital winter overlap, the industry has begun to pay attention to mergers and acquisitions, that is, listed companies acquire start-ups, and large companies acquire small companies.

However, in the domestic chip design industry, it will only be a low-probability event for companies to be acquired. The later it is, the greater the obstacles to being acquired, and the smaller the probability. To understand the mergers and acquisitions in the domestic chip industry, we can start from the timing of mergers and acquisitions, the value of mergers and acquisitions, and the methods of mergers and acquisitions.

M&A timing

When choosing the timing of being acquired, companies will evaluate from four dimensions: macroeconomic situation, capital market situation, industry situation and corporate situation. However, M&A in the chip industry is mainly driven by the following three points.

1. Technology is mature and products are commercially available

The spring of domestic chip entrepreneurship began in 2018 and gradually entered a cold winter in 2023. This is a long winter. Don't expect the arrival of spring. The spring of entrepreneurship will never come back. The high and low demand in the semiconductor market is only related to the top companies in the track, and has little to do with other companies. The impact can be ignored.

Generally, chip products will complete the process from technology to product and from product to commodity after 5 years. A large number of repeated research and development of low-end and mid-end chips have made technology and products more and more mature, and the market has also been involuted everywhere. Only spending money, not making money, some chip companies are desperate.

2. No way to go public, no hope of financing

In the previous article, it was mentioned that among the 3,451 chip design companies in China, at least 3,000 are not profitable. After the company's cash flow is exhausted, if there is no way to go public and no hope of financing, seeking mergers and acquisitions is the only way out.

3. Capital withdrawal, forced mergers and acquisitions

It is obvious that capital is beginning to be anxious to withdraw. In order to stabilize investment, the state issued a document some time ago proposing to strengthen "patient capital" and play the role of "stabilizer" in the long-term capital market. What is "patient capital"? It refers to capital that can withstand short-term fluctuations or drawdowns from investment concepts to assessment mechanisms, including social security funds, pensions, enterprise annuities, occupational annuities, industrial capital, and individual investors with long-term investment concepts.

Some chip companies have made good progress in technology and product research and development, have cash flow, and are even profitable, but they do not see opportunities to go public in the short term. If investors are anxious to withdraw, they will force the founders of chip companies to repurchase or seek mergers and acquisitions.

Merger and acquisition value

Mergers and acquisitions are to create value. Chip companies mainly have three purposes for mergers and acquisitions:

1. Increase revenue and profit

The two core goals of business operations are to obtain revenue and realize profits. All mergers and acquisitions are aimed at increasing revenue and profits.

There are very few companies in the domestic chip design industry that have both revenue and profits, especially companies with revenue of more than 100 million and profits. Generally, they will not consider being acquired. If the revenue is tens of millions and the company is profitable, this is the highest probability of successful mergers and acquisitions. If the revenue is tens of millions or there is no revenue, the company continues to lose money, the value of the merger and acquisition is very low, and the probability of being acquired is also very low.

2. Recognize the team's capabilities and potential

The company has no value for being acquired, but the chip design and R&D team is valuable. Recognize the team's capabilities and potential. After integration and empowerment, revenue and profit can be achieved. Such mergers and acquisitions also have opportunities.

However, there is a mentality in China that since it is an acquisition team, why do you want to acquire a company? The best way is for the company to go bankrupt and liquidate, and the team to be incorporated.

In this case, investors generally make concessions, accept investment losses, accept low prices to sell the company, and stop losses in time.

3. Enrich product lines and enhance customer stickiness

M&A is first of all aimed at the company. There are not many chip companies worth M&A in China, and there are even fewer valuable chip companies willing to be acquired. Secondly, it is aimed at the team, and finally, it is aimed at the product line.

When chip investment was hot in the past few years, chip companies did not consider input and output at all. A large amount of funds and manpower were invested in research and development, and some good products were indeed made. These product lines are also valuable in the market, but with the continuous joining of friendly companies, there are sales but no profits. With the ebb of capital, this kind of game with only input and no output cannot be sustained at all.

Although mergers and acquisitions can enrich product lines and enhance customer stickiness, such companies are not economical, with many people and high expenses, and will become a burden after mergers and acquisitions.

M&A methods

The previous section introduced the timing and value of M&A in the domestic chip industry. Finally, we come to the M&A methods. The valuations of different M&A methods vary greatly. We will introduce them in order according to the valuations:

1. M&A companies

The previous section analyzed how many chip design companies are worth M&A, and whether the M&A creates value or becomes a burden. Here we will talk about the three levels of M&A companies:

The first level is that the M&A valuation is greater than the valuation of the previous round, and the entrepreneurial team and all investors have benefits. This is the best M&A result.

The second level is that the M&A valuation is lower than the valuation of the previous round but higher than the net investment. The investors reach an agreement through negotiation, and the entrepreneurial team and all investors have a slight benefit. This result is also good.

The third level is that the M&A valuation is lower than the net investment, and the investors accept the loss and minimize the loss through M&A. This result is not too unsuccessful and is still successful among many chip startups.

2. M&A team

The situation of M&A team will appear in small-scale chip startups. Once the chip company grows larger, there will be no M&A team.

The M&A team is actually the M&A chip design and R&D team. The sales team, operation team and application team will not be the priority targets of M&A.

Excellent chip design teams are scarce, and M&A can reduce trial and error time and sunk costs. In the future, M&A of R&D design teams will be the first choice and mainstream of M&A in the domestic chip industry.

3. M&A products

In the domestic chip industry, there should be few cases of M&A for product lines. Either they are unwilling to be acquired or they are cheap enough. Moreover, the life cycle of chip products is relatively short, about 3 years. If there is no R&D team to continue iterating and upgrading, they will soon be eliminated (it takes one year for the product to be imported into the mass production). Judging from the current trend, selling chip mass production masks will be more popular, which is cheap and simple to trade.

In short, it is not easy for domestic chip companies, whether listed or non-listed companies, to make money. There is not much spare money on hand. What they want is to acquire profitable companies and product lines, or pick up a bargain, buy some technical IP, patents, and products at a low price, integrate resources and transform them into profitable product lines.

The domestic chip industry is indeed entering the M&A integration stage, but M&A integration is based on the premise that chip startups go bankrupt and liquidate, and then acquire them at super low prices. Is reality so cruel? We can only wait and see.

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