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Bankers See M&A Activity Rising
January, 27th 2010

Deal making in the semiconductor sector should accelerate this year after a dismal 2009, bankers said, helped by strong balance sheets and a need to patch strategic holes as tech markets converge.

After months in which only tiny acquisitions gained traction, larger deals are also ahead. Dave Creamer, head of Jefferies & Co.'s semiconductor unit, said venture capital and private company deals are likely in the current quarter, while deals for public companies could start hitting the tape in the second quarter.

"There is definitely a lot of activity in semis underway," he said.

Last year, mergers and acquisitions activity in the U.S. semiconductor sector fell to $3.2 billion from $11.2 billion in 2008, a 72% drop, according to Dealogic. Large deals fell apart over the last two years too, including several attempted hostile acquisitions.

Broadcom Corp. (BRCM) couldn't wrangle Emulex Corp. (ELX) last year. And in late 2008, Samsung Electronics Co. (005930.SE) failed in its bid for SanDisk Corp. (SNDK) while a joint acquisition attempt by Microchip Technology Inc. (MCHP) and ON Semiconductor Corp. (ONNN) for Atmel Corp. (ATML) stumbled.

Now that stock valuations have recovered from multi-year lows, sellers should be able to fetch prices that satisfy shareholders, bankers said. And buyers that have hoarded cash through the recession have ample reserves to target new areas with higher growth.

Broadcom paid roughly six times revenue in its $178 million acquisition of privately held Dune Networks in November, according to a person familiar with the matter--a multiple one banker called "substantial, and justifiable."

Deals between publicly traded companies have been scarce, making comparisons difficult. But Applied Materials Inc. (AMAT) made one of the latest public acquisitions of Semitool Inc., which it completed in December, paying a 31% premium for all outstanding shares of the company's stock.

JP Morgan analyst Chris Danely said companies such as Intel Corp. (INTC) and Analog Devices Inc. (ADI) appear positioned to make acquisitions.

"We believe Analog Devices is interested in expanding its power management product portfolio," he wrote. Monolithic Power Systems Inc. (MPWR), Intersil Corp. (ISIL) and National Semiconductor Corp. (NSM) "could all be strategically attractive."

Intel, he said, could grab suppliers in the embedded or system-on-chip markets, where it hopes to expand market share with its popular Atom chip.

An Intel spokesman said the embedded market "is obviously an important one" for the company, but declined to comment on the possibility of any acquisitions.

Analog Devices declined to comment.

Jefferies' Creamer said areas that should see activity include technology for smart phones, mobile television, technology infrastructure and companies working in the smart-grid space.

Technologies that connect different types of devices are expected to be a hot area for deal-making as chip makers vie for a bigger share of this high-growth market.

One of the big themes at the Consumer Electronics Show this year was the "connected home," which will let consumers link up all of their electronic devices to share movies and other content.

Another banker who asked not to be identified said shareholders of potential buyers appear less worried about dilution and employing cash, "as long as you can show you are entering a market where there is growth going forward."

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