What Is Going On?

The problem for semiconductor managements, argues John Daane, CEO of Altera, is that they tend to be growth-oriented people, but how do they achieve growth?

"The rational answer is by consolidation, but you have to ask what is the synergy of an acquisition? If you're just bolting on new stuff, to get into new space, without a core synergy, then you're not going to be successful."

The financial people, particularly the private equity people, seem to think that that the right strategy is to consolidate along vertical lines, i.e. to put together companies which can create expertise in a particular market area and then gain market share.

But does this kind of consolidation work in the semiconductor industry? "The vast majority of acquisitions fail," says Daane, "if you see that as a way to grow, you have to be very cautious."

"Cisco (which has done numerous acquisitions) says if you put two companies together the cultures have to be similar, or you get people working against eachother", says Daane, "people always under-estimate the work you have to do to change a culture".

In some ways the industry is consolidating with, say, the foundries getting into design and IP creation, and AMD buying ATi to get into graphics chip-sets to complement its processors.

In other ways the industry is de-consolidating with the rise of new business model design companies (e.g. Verisilicon, Alchip, eSilicon) which undertake the financial and technical risk of designing chips, and with the rise of the IP companies. Both challenge the position of the IDMs.

And the IDMs are promoting de-consolidation by increasingly dumping their R&D and manufacturing expertise in order to increase cash-flow either at the behest of their private equity owners, or in fear of attracting a private equity takeover and makeover.

"The broadline companies will disaggregate into specialist companies," reckons Daane.

Certainly the long-term, 20 year, trend of the industry is towards de-consolidation, because the top ten companies have, collectively, been consistently losing market share for 20 years.

As so often, the future of the industry is very unclear. But one thing never changes. For one group of companies the industry is always a gold mine, for another group life goes on much the same, for a third group it's Skid Row.

The question always is: 'Which group is which?'