- China-based Tsinghua Unigroup is interested in a merger with leading U.S-based semiconductor chipmaker, Micron Technologies.
- The deal would become the second largest in the chip industry after the proposed merger between Avago and Broadcom.
- Tsinghua's bid is likely to face considerable regulatory hurdles due to genuine security concerns.
- The current political atmosphere with the presidential polls in 14 months makes the deal unlikely to happen now.
Micron Technologies (NASDAQ:MU), shares are up 18% from the 2-year low they reached about two weeks ago. The impressive rally has been triggered by news that the chairman of Tsinghua Unigroup, the leading Chinese chip manufacturer, had visited the country to revive talks to acquire Micron for $23 billion, or $21/share, representing more than 38% premium to Micron’s price back then, and a considerable 25% premium to current price.
Micron had earlier told Tshingua that it did not think the U.S. authorities would allow the deal to sail through due to what it termed ‘‘security concerns.’’ The fact that the Chinese company raised the matter once again just a few months after its first attempt was rebuffed means it strongly believes that such a deal can still happen.
Security concerns, not size of the deal, the real issue here
The chip manufacturing industry has lately been undergoing a spate of consolidations, including some very large ones. The FTC recently approved a massive $37 billion merger between smartphone semiconductor chip manufacturer Avago Technologies (NASDAQ:AVGO) and Broadcom (NASDAQ:BRCM), effectively making it the largest ever M&A deal in the semiconductor chip industry. Meanwhile, Intel (NASDAQ:INTC) has already announced its intention to buyout the second-largest field programmable gate arrays, or FPGA, processor maker Altera (NASDAQ: ALTR) in a $16.7 billion deal. In the case of Avago, the smartphone chip industry is pretty heavily fragmented so the Avago deal does not really raise genuine antitrust issues despite its size.
Intel’s proposed takeover of Altera is, however, a bit more complicated because Altera and Xilinx command more than 90% of the FPGA market. Removing Altera from the mix would effectively give Xilinx near-monopoly status and raise genuine antitrust concerns. Nevertheless, many analysts believe that the Intel deal will be approved by the authorities since the FPGA sub-sector is merely a niche industry that accounts for just 2% of the semiconductor chip market.
The Micron deal, however, does raise genuine antitrust concerns. Micron remains the largest U.S.-based semiconductor chip manufacturer. Meanwhile Tshingua Unigroup, is a state-owned company that is directly controlled by Tsinghua University in Beijing. Tsinghua’s merger attempt with Micron is part of the Chinese Government’s effort to expand the country’s local chip manufacturing capacity. Although China ranks as the world’s largest semiconductor chip consumer accounting for 45% of global chip demand, it has been late to the chip manufacturing business and primarily imports is semiconductor chips. But the Beijing Government is making concerted efforts to change this and has set aside $170 billion to be spent over the next five years on expanding the sector.
Tshingua has already completed the acquisition of U.S. chipmakers Spreadtrum and RDI Microelectronics, though the deals were worth only a combined $2.6 billion. The Chinese chip manufacturer has made other such deals and risen to the top of the Chinese chip manufacturing chain. A Micron takeover would represent a merger between two of the largest chip manufacturers in two of the world’s largest economies. The fact that U.S. presidential polls are looming, and several U.S. politicians have already called for the rejection of the proposed deal citing Micron's role in making chips used in U.S weapons systems, makes a merger all the more unlikely.
The Department of Justice recently scuttled a proposed merger between two of the world’s largest chip equipment makers citing antitrust concerns --U.S.-based Applied Materials and Japan’s Tokyo Electronics, despite the fact that the deal involved Applied Materials taking over Tokyo Electronics and building what would have been a huge lead over its rivals. The move caught investors by surprise since many had already assumed that the deal would receive regulatory approval, and the two companies had already rebranded themselves.
Another Tsinghua bid still possible
The current politically-charged atmosphere in the U.S greatly minimizes chances of a merger between Micron and Tsinghua, at least not any time soon, if ever. But this probably won’t be enough to prevent Tsinghua from launching another bid post-election time maybe around 2017. It would be really interesting to see what would transpire if Tsinghua raised its offer price from $21/share to maybe something in the ballpark of $40/share.
Micron YTD Share Return
But then again it’s quite likely that Micron stock will have fully recovered by then. Though the stock is down 52% YTD due to the cyclical downturn being witnessed in the DRAM market, the situation is expected to start improving in 2017 and hit full recovery in 2018. Maybe Micron shareholders won’t really need another merger offer to prop the shares.