M&A in the Semiconductor Industry: Will Qualcomm Be Next to Make a Deal?

By Markets Fool.com

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Source: Qualcomm website.

Recently, there has been a flurry of mergers and acquisitions activity in the semiconductor industry. Two large deals have come to pass in a short time. On June 1, Intel Corporation, the largest semiconductor company in the world, announced it would be buying Altera for $16 billion. This came just a few days after Avago Technologies announced it had entered a deal to buy out Broadcomin a $37 billion cash-and-stock deal.

These huge deals, one right after the other, should compel investors to ask which domino might be the next to fall. If the chip industry is entering a period of consolidation, it seems Qualcomm is a likely candidate to toss its hat into the M&A ring. Qualcomm's making a meaningful acquisition would work not just on a strategic level, but from a financial perspective, as well. This is why I wouldn't be at all surprised to see Qualcomm snatch up a smaller rival this year.

Qualcomm needs a boost
Qualcomm is struggling in its core business, which could prompt management to make a strategic acquisition. The company recently notably lost what it refers to as a key customer; many analysts have surmised the customer is Samsung and the product was the Galaxy S6. Because of this, Qualcomm is likely to struggle in the current quarter, and it also reduced its outlook for the full year. Management has projected that revenue will decline by 9%-21% year over year in the current quarter and by as much as 6% for the full fiscal year.

Additionally, Qualcomm is still grappling with a problem pertaining to its licensees. Qualcomm has reported in recent quarters that it believes certain licensees in China are under-reporting sales of licensed 3G and 4G devices. The company did note that it settled with one major licensee in the first quarter, but issues remain.

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It seems clear that Qualcomm needs to do something to get growth going once again and an acquisition may be just the cure for what ails Qualcomm.

Strategic fits
There are a few smaller chip companies that could be takeover targets for Qualcomm. One interesting candidate could be Skyworks Solutions , a supplier to Apple (like Avago), and a key player in the Internet of Things arena. Skyworks develops high-performing analog chips that boost device connectivity. Skyworks recently unveiled new analog control products applicable in connecting the home, as well as smart lighting, that support high data rates and can withstand extremely high temperatures.

An acquisition would make sense on two levels. First, Qualcomm could use some diversification in wireless, especially if the reports of losing Samsung are accurate. Second, Qualcomm would get a foothold in the IoT space, which is projected to be a high-growth technology business going forward. And of course, it wouldn't hurt to gain access to the highly lucrative Apple supply chain. These angles are clearly benefiting Skyworks, which grew revenue by 59% during the first two fiscal quarters.

Or Qualcomm might decide to go a different route. In the same diversification theme, Qualcomm could purchase an ARM-based chip maker like Advanced Micro Devices. This would help increase Qualcomm's presence in servers at the enterprise level.

The key takeaway is that Qualcomm is seeing cracks starting to appear in both its wireless and licensing businesses, and an acquisition could provide valuable diversification and entry into some exciting new areas.

Financial matteres
Qualcomm generates a lot of cash, and with little debt on the books, this has resulted in a huge cash pile. The company now holds $29.6 billion in cash, cash equivalents, and marketable investments on the balance sheet, and has almost no long-term debt.

Skyworks has a market cap of $20 billion while the market gives AMD a market cap of just $1.8 billion.

All this cash might be burning a hole in Qualcomm's pocket. With interest rates still extremely low, this cash isn't earning much at all. It seems Qualcomm could create far more value for shareholders by making a strategic acquisition to help spur growth.

Is Qualcomm next?
As the chip business reaches advanced maturity, growth is slowing down, which is resulting in consolidation. In fact, according to a recent analyst note published by Bernstein Research, M&A deal volume in the semiconductor business has reached $63 billion so far this year, which is already double the $31 billion in deals in all of last year.

Qualcomm is a huge company with deep pockets, but its growth is slowing as it battles allegedly under-reporting licensees and the loss of a key customer. I wouldn't be surprised to see Qualcomm announce a major acquisition this year.

The article M&A in the Semiconductor Industry: Will Qualcomm Be Next to Make a Deal? originally appeared on Fool.com.

Bob Ciura owns shares of Apple. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Qualcomm, and Skyworks Solutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.