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A wave of semiconductor consolidation drives big tech valuations in October

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A wave of semiconductor consolidation drives big tech valuations in October

After a return to growth in September, the information technology sector saw deal volume drop year over year in October, even as transaction values remained robust.

The month saw 181 deals, down 13.0% from October 2019. However, Advanced Micro Devices Inc.'s $38.53 billion bid for programmable hardware company Xilinx Inc. led a high-dollar roster that included five other transactions over the ten-figure mark. The month added momentum to a return to business for information technology M&A and M&A advisers.

Advisory units from Bank of America Corp. and Morgan Stanley provided fairness opinions and consulting services for Xilinx on the transaction. Both those firms are reaping substantial fees from the semiconductor megamerger trend. In July, they agreed to advise Analog Devices Inc. on its over $20 billion acquisition of Maxim Integrated Products Inc., which marked a return to the information technology transaction market after the pandemic slump. Morgan Stanley signed another microchip megamerger contract in September, advising NVIDIA Corp. on its $40 billion acquisition of U.K.-based ARM Ltd.

Advisory fees were not disclosed for Bank of America or Morgan Stanley on any of those semiconductor deals, but for comparison, in 2019 a Bank of America unit advised and provided a fairness opinion for Global Payments Inc.'s $26.71 billion acquisition of Total Systems Inc. It collected $23.0 million in fees on that consultation, as well as $2.0 million for the fairness opinion.

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The Xilinx transaction is not only the largest deal ever undertaken by AMD, but the second-largest of the semiconductor sector since 2000. The consolidation of the sector is intensifying competition, and AMD's combination with Xilinx will help it advance its market position against the biggest player in the chip business, Intel Corp., as well as its biggest rival, Nvidia, according to 451 Research analysts John Abbott and Scott Denne. A surge in AMD's market capitalization facilitated the deal and the 11.9x multiple on Xilinx's trailing revenue. That was just under AMD's valuation leading up to the deal, which represented a big jump from its 6.3x multiple only a year ago, according to the analysts' report on the transaction. 451 Research is an offering of S&P Global Market Intelligence.

The consolidation in the semiconductor space is partly driven by demand for data-center management technology as more and more computing moves to the cloud, analysts told S&P Global Market Intelligence. Also supporting the consolidation are rising valuations. AMD's beanstalk growth in market cap represented a 126.8% surge in stock price during the past 12 months. Nvidia shares during the same period grew by 144.3%.

The wave of semiconductor consolidation did not stop at the AMD-Xilinix deal. The second- and third-largest deals of October were also in the sector. Bank of America again showed up as an advisor for Intel on its $9.0 billion sale of its NAND SSD, component and wafer business and NAND memory manufacturing facility in China to Korean semiconductor company SK hynix Inc. Bank of America worked alongside a Korean Citigroup Inc. unit, which advised SK hynix.

Intel may have been motivated to sell those assets due to the rising cost of manufacturing advanced chips. Intel is one of the few companies left that both designs and manufactures its own products, whereas its competitors design chips and outsource manufacturing to foundries. Conversely, the AMD-Xilinx deal is a validation of the outsourced model employed by other semiconductor designers, an analyst told S&P Global Market Intelligence.

Qatalyst Partners LP and JPMorgan Chase & Co. advisers worked on the second-largest transaction of the month, Marvell Technology Group Ltd.'s $9.46 billion acquisition of high-speed analog and mixed-signal semiconductor company Inphi Corp.

Outside of the semiconductor space, Visa Inc.'s $4.90 billion acquisition of fintech company Plaid Inc. may be in jeopardy after the U.S. Justice Department launched an antitrust lawsuit against Visa, arguing that the combination would eliminate a competitor that has been developing "an innovative new solution that would be a substitute" for Visa's online debit services. The Justice Department called Visa a monopolist in online debit and pointed to the company CEO's description of the Plaid acquisition as an "insurance policy" against a potential threat.

While fees were not disclosed, termination of the Visa-Plaid transaction could put adviser revenues in jeopardy for Goldman Sachs Group Inc. and Lazard Ltd.