Infineon to Take Over Cypress Semiconductor in $10 Billion Deal
Infineon Technologies said it would buy Cypress Semiconductor for $10.1 billion, transforming it into the world's largest producer of chips used in automobiles and giving it more scale to succeed in the Internet of Things. The deal also highlights the seduction of scale in the global chip industry, which has been reshaped in recent years as companies consolidate to combat high costs and slow growth.
Santa Clara, California-based Cypress sells computer chips and connectivity products that Infineon said will its sensors, security and power semiconductors. Once the deal closes, Infineon plans to start selling new combinations of chips aimed at billions of different devices, ranging from washing machines to autonomous cars. That means almost anything battery-powered or using an electric motor or power supply.
Infineon’s chief executive, Reinhard Ploss, said the "landmark" deal would advance its industrial and automotive ambitions. "Our business model is becoming more robust, we are accelerating our profitable growth, and strengthening Infineon's earnings," he said on an analyst conference call Monday. "With this transaction, we will be able to offer our customers the most comprehensive portfolio for linking the real with the digital world," he added.
The deal comes amid a slowdown in overall semiconductor demand. Infineon, blaming weakness in global car production and economic uncertainty in China, slashed its annual sales forecast in April from $10 billion to $9.2 billion. Infineon warned that sales growth in the second half of 2019 would be slower than it projected. Global chip sales are expected to plunge 8% in 2019, the biggest annual decline in a decade, according to IHS Markit.
Infineon agreed as part of the deal to pay Cypress $23.85 per share, a more than 50% premium to the company's share price prior to reports about a potential deal. The offer for Cypress also represents a roughly 45% premium to the company's average share price over the last month and 4.5 times sales last year, Infineon said. The company acknowledged that the price is "a lot of money" but said that the growth opportunity was worth it.
The deal moves Infineon ahead of NXP Semiconductors as the world leader in automotive chips, an area that already accounts for more than 40% of its sales. Infineon, currently the world's largest player in power semiconductors and sharing with NXP the market lead in security chips, said it would control 13% of the automotive chip market after the deal closes. Cypress's customers include Continential, Delphi and Toyota, among others.
The deal also represents its biggest ever bet on the Internet of Things. Cypress says the part of its business related to the Internet of Things, which accounts for nearly 30% of its sales, to grow 12% to 14% on average annually. The company's USB, Wi-Fi and Bluetooth hardware and software can be used to connect a diverse range of devices to the internet. The deal also shores up Infineon's position in the 32-bit microcontrollers market.
Infineon is the 11th largest supplier of semiconductors in the world, IHS Markit says. Once the deal closes in the second half of 2019 or the first half of 2020, the combined company will take over eighth place, vaulting ahead of STMicroelectronics and Toshiba. Steve Albrecht, Cypress's chairman, said the deal would “create product opportunities that are increasingly important in the competitive automotive, industrial and consumer markets.”
Hassane El-Khoury, chief executive of Cypress since 2016, said the merged company is poised to take advantage of "the massive rise in connectivity and computing requirements." He added: "Jointly, we will enable more secure, seamless connections, and provide more complete hardware and software sets to strengthen our customers products and technologies in their end markets." El-Khoury said the two companies are a "strong fit."
Infineon, which has nearly 41,000 employees, said it would gain economies of scale that will within a decade amount to $1.5 billion of added annual sales. The deal also diversifies its chip development efforts: Cypress, which employs 5,800 people, is spending 85% of research and development dollars on connectivity and computer chips used in the Internet of Things. That came out to $300 million of its $2.5 billion of revenue in 2019.
Infineon has bought into new businesses before. In 2014, the company agreed to pay $3 billion for International Rectifier, expanding its market share in power semiconductors. Infineon’s offer for Cypress represents its largest deal ever and signals the potential for more consolidation in the chip industry. The value of acquisitions announced in 2015 came to more than $105 billion but dropped to $25 billion in 2018, according to IC Insights.
Many of the company's closest competitors are also seeking to reach customers in new markets and broaden their product offerings. In May, NXP said it would buy Marvell's wireless connectivity unit for $1.75 billion. Sales of the acquired Wi-Fi and Bluetooth products are projected to double by 2022. In March, On Semiconductor agreed to acquire Quantenna Communications for $1.1 billion, moving into the market for Wi-Fi products.
Infineon's offer for Cypress is focused on the future of the automotive industry. The average value of semiconductor content in cars is projected to grow from between $300 and $1000 per car in 2018 to between $400 and $1500 in 2023, according to Strategy Analytics. Cypress projects its sales per car will double from about $90 in 2018 to $180 in 2023, while its automotive sales will grow at an average annual rate between 8% and 12%.
Cypress sells microcontrollers that can be used in dashboard displays, automotive clusters and body control modules for opening and closing windows, locking and unlocking doors, or turning on and off windshield wipers. The company's USB, Bluetooth and Wi-Fi chips can also be used in cars. Cypress has introduced NOR flash memory with high bandwidth and high endurance for use in advanced driver assistance systems (ADAS).
Infineon, which claims to control about 11% of the automotive chip market, sells chips that can control the car's acceleration, steering and braking. Infineon's Aurix MCUs are also used to make sense of information from radar and other sensors and to manage the car's engine, transmission or electric power train. "Together we cover the entire range of electronic architectures in the car," Ploss said. "We are strengthening ourselves significantly."
Infineon, which commands close to 20% market share in power semiconductors, is also piggybacking on growth in electric car production. The company sells discretes power devices and other solutions that prevent overheating and boost the energy efficiency of electric cars and hybrids. The company's discretes are based on silicon (Si), silicon carbide (SiC) and gallium nitride (GaN). Infineon also offers radar sensors and in-car networking chips.
Infineon said that the combined company is projected to see annual sales growth of more than 9% into the foreseeable future. It also sees economies of scale eliminating more than $200 million in overlapping costs every year starting in 2022. The company's shareholders, however, found fault with the deal: Infineon's share price shed 8% after the announcement Monday. Cypress's shares added around 24% on news of the deal.
The deal also faces regulatory uncertainty after Infineon’s failed attempt to buy Cree’s Wolfspeed unit. The deal was abandoned in 2017 after the Committee on Foreign Investment in the United States, or CFIUS, challenged it on national security grounds. The agency, which evaluates takeovers of American businesses, has become a gatekeeper of major deals in recent years as the United States moves to shelter its technology industry.
The deal is also the latest test of the Trump administration's protectionist policies surrounding chips. Last year, President Trump blocked Broadcom's $117 billion bid to buy Qualcomm, pointing to the potential harm to American leadership in 5G technology. Infineon said it would have to pay Cypress $425 million if the deal collapses under regulatory pressure, while Cypress will pay $330 million in breakup fees if Infineon is outbid.
The company played down concerns that the deal could be derailed by regulators in the United States or China. While Wolfspeed sells chips to the aerospace and defense customers, Cypress is focused on industrial and automotive applications, which are less sensitive from a regulatory standpoint. Ploss said he feels "reasonably comfortable" about getting the regulatory green light. "This is a completely different situation than Wolfspeed."
