Will Chipmakers Get Invited to Tech M&A Party?

As prospects brighten for IT spending next year, big hardware vendors have been coming out of the woodwork and laying the groundwork for growth with some big M&A plays. Cisco Systems Inc. (CSCO) struck its biggest deal in two years with Thursday's agreement to buy Tandberg ASA (TADBF.PK). Xerox Inc. (XRX) came out with its largest deal ever Monday with the $6.6 billion purchase of Affiliated Computer Services Inc. (ACS), while last week Dell Inc. (DELL) offered $3.9 billion to acquire Perot Systems Corp. (PER).

Could the same be around the corner for the semiconductor sector? Conditions are starting to look up for chipmakers, which have been saddled with the worst downturn in demand for their products in over a decade. The industry's trade association noted Friday that industrywide sales last month were $19.1 billion, a 5% climb from July's figure. While that still represents a 16.1% decline from August 2008, the rate of decline is flattening.

The group's president, George Scalise, credited incentive programs for energy-efficiency for bolstering chip sales. Big growth in netbooks and lower average selling prices for laptops have helped, too.

"Notwithstanding the slow recovery of demand from the enterprise sector, we are encouraged that industry momentum has turned positive.".

In the meantime, some of the biggest chipmakers have amassed some impressive cash hoards, which could provide ample ammunition for M&A deals. EETimes on Thursday published a list of the richest semiconductor companies, and, not surprisingly, Intel Corp. (INTC) was at the top with $10.5 billion (that figure subtracts long-term debt from cash and short-term investments). Next in line was wireless chip specialist Qualcomm Inc. (QCOM), with $9.9 billion, followed by Taiwian Semiconductor Manufacturing Co. (TSM).

The wealth held by these companies is no guarantee that the industry is in for a spate of acquisitions. But targets abound, with a lot of smaller public chipmakers struggling with debt and even more private semi companies looking for a lifeline as venture capitalists have all but ignored this sector through the downturn.

-- Olaf de Senerpont Domis