Skyworks, the maker of radio components that are inside many mobile phones, has agreed to buy PMC-Sierra, a provider of data center chips, in a deal valued at $2 billion. The cash deal may strike many as odd, but it’s really the story of a chip firm needing to get bigger as the market embraces consolidation.
There is significant pressure in the semiconductor industry to consolidate, which has driven everything from Avago’s $37 billion deal to buy Broadcom to last month’s deal where Dialog agreed to buy Atmel for $4.6 billion. Much of this is spurred by opportunities to build products for emerging business opportunities, such as the $16.7 billion acquisition of Altera by Intel (INTC), or buying sales teams to attack a new market. In the case of Skyworks (SWKS) and PMC (PMCS) this is all about buying new product lines and buying scale.
In a conference call discussing the deal, Skyworks CEO David Aldrich explained that for a certain level of customer, Skyworks can’t even get in the door without a certain level of size and scale, so this deal helps them enter new markets. With PMC, new market opportunities are primarily found in providing networking gear and storage chips to companies that build out hyper scale data centers.
Skyworks is getting into this business for the first time because it believes that this market will only grow as more enterprises throw their data into the cloud for analysis. It’s a safe bet given that storing and computing data has become so cheap that most data experts advise collecting more data rather than less. Skyworks is also making a smart move to diversify its portfolio.
Skyworks chips are inside the latest iPhones, but with every new iPhone release it faces a significant potential loss in revenue should Apple (APPL) decide to switch suppliers. With that in mind, it’s smart to buy an entirely new line of business to offset the mobile business.
There is also the competition Skyworks faces from Avago (AVGO), Qualcomm (QCOM), and others who are trying to consolidate components into smaller silicon packages. When it comes to the mobile world, smaller and more consolidated chip packaging makes devices cheaper and often more power efficient, which can give manufacturers a reason to switch.
The deal is expected to close in the first half of 2016.
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