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Deals Sweep Up Smaller, Midsize Makers of Chips

A wave of consolidation has tightened the number of chipmakers in Orange County.

Among the top 20 local chip companies here, nearly a quarter of them have been bought in the past 12 months.

The changes are set to be reflected on the Business Journal’s annual list of chipmakers here in the Nov. 17 issue.

The deals include buys of three startups and two midsize players. The biggest deal involved Newport Beach contract chipmaker Jazz Semiconductor Inc., which last month was bought by Israel’s Tower Semiconductor Ltd. for about $170 million in stock and debt.

The consolidation isn’t surprising given the concentration of chipmakers here, according to Derek Lidow, chief executive of El Segundo-based market tracker iSuppli Corp.

“The trend has more to do with the fact that Orange County has tremendous expertise in multimedia processing and wireless technology,” Lidow said. “Those two areas right now have seen a lot of changes in the end customer base, and that is being reflected in the significant mergers and acquisitions activity locally.”

Acquisitions of startups have dominated local deals.

In December, Irvine’s u-Nav Microelectronics Corp., a maker of GPS chips and software, was bought by Santa Clara-based Atheros Communications Inc. for $54 million.

And Newport Beach’s GloNav Inc. was bought by NXP Semiconductors, the former chip arm of Royal Philips Electronics NV, for $85 million in December.

In August, Foothill Ranch-based Aristos Logic Corp., a maker of controller chips for storage networks, sold to Milpitas-based Adaptec Inc. for $41 million in cash.

Competition for contracts, particularly for cell phones, has pushed smaller companies out of the market, Lidow said.

“Four or five handset manufacturers now comprise nearly 100% of all the cell phones made,” he said. “With just five handset makers, you cannot have a dozen or more companies trying to sell them chips.”

Smaller companies often don’t have the budget for the kind of research and development required to vie for big contracts, Lidow said.

“The big guys, such as LG Group and Nokia Corp., have extremely sophisticated standards and each generation of design gets more complicated for the suppliers,” he said. “If you don’t have the money to invest in research and development, you might lose your place in line, and it’s almost impossible to get it back. It’s better to consolidate with someone else.”

Other companies have been bought as the chip market and larger economy slows.

Investors in chipmakers have grown accustomed to big profits and steep revenue increases year after year, prompting companies to turn to acquisitions to keep up the pace.

Jazz Semiconductor’s acquisition by Tower Semiconductor was a case of staying competitive.

Before the sale, Jazz’s board had been looking at “strategic alternatives” to raise its slumping stock, which was off some 50% in the past year and trading at less than $1 a share at the time of the deal.

Executives at one point determined Jazz needed to double in size to compete with bigger rivals.

“It’s a sign of the times,” said Jim Peterson, chief executive of Irvine chipmaker Microsemi Corp., which paid $25 million a few months ago to buy its longtime rival Costa Mesa-based Semicoa Semiconductors Inc. “For the smaller companies, it’s difficult to survive only as a product line. You are better served becoming a division within a larger company.”

Buying to grow is still a bit of a risk, according to iSuppli’s Lidow, because it doesn’t always boost investors’ confidence.

“The investor community does not give the same credit for a company who grows only by acquisition,” Lidow said. “They view that as a fallback plan and investors are skeptical of its ability to grow profits.”

Irvine-based communications chipmaker Broadcom Corp., the county’s largest chipmaker with a market value of about $9 billion, continues to be among the consolidators.

In September, Broadcom offered $193 million in cash for Advanced Micro Devices Inc.’s digital TV chip business. That deal is expected to close by the end of the year.

In March, it bought Sunnyvale-based Sunext Design Inc., a maker of chips for high-definition video players, for about $48 million.

Last year Broadcom paid $226 million for San Jose’s Global Locate Inc., a privately held maker of GPS chips.

The buys were shrewd moves aimed at grabbing market share in areas that were relatively new to Broadcom, Lidow said.

“Broadcom has been very successful at knowing exactly the right technologies to invest in and when to do it,” he said.

Western Digital May Buy Fujitsu Drive Business

Lake Forest-based Western Digital Corp. was reported to be in talks to buy the disk drive business of Japan’s Fujitsu Ltd.

Reports last week from Japanese newspapers and Reuters say a deal could be worth $662 million to $945 million. Other companies are said to be talking with Fujitsu.

If a deal comes about, it would double Western Digital’s market share in 2.5-inch drives used in laptops to about 30%.

That would put Western Digital ahead of archrival Seagate Technology LLC in 2.5-inch drives.

Seagate, the No. 1 maker of drives, and No. 2 Western Digital control about 60% of the total market for drives used in computers and consumer electronics.

Fujitsu has struggled to compete as the industry’s boom of the past few years gives way to lessened demand and a buildup of unsold drives.

The company’s drive business lost about $50 million in the 12 months through March.

A Fujitsu representative denied media reports of sale talks.

Japan’s Nikkei business daily quoted an unnamed source saying Fujitsu wants to sell the business by year’s end.

Fujitsu is looking to sell its drive business to focus on technology consulting services, where it competes with IBM Corp. and Electronic Data Systems Corp.

The company left the cutthroat market for PC drives in 2001 to focus on drives for laptops and servers. In 2002, Western Digital bought a Thailand drive plant from Fujitsu.

Western Digital’s stock is down about 30% for the year so far with a market value of about $4.5 billion.


,Michael Lyster

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