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Chinese semiconductor M&A under pressure in 2019, analysts say

Intensified scrutiny of Chinese investments will dampen M&A activity within its semiconductor sector in 2019, analysts say.

The number of mergers and acquisitions in China's semiconductor sector fell slightly to 53 in 2018, from 54 in 2017, according to data compiled by S&P Global Market Intelligence. M&A activity was even lower in 2016, with only 40 completed transactions in the Chinese semiconductor and semiconductor equipment industry.

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Nick Marro, an analyst at the Economist Intelligence Unit, attributed 2018's muted M&A activity in China to the U.S. and EU's enhanced scrutiny of inbound Chinese investments. This is "driven by a mix of concerns ranging from strategic competitiveness to national security," Marro said, adding he does not expect the policy to be relaxed for another few years.

Chinese telecommunication equipment makers ZTE Corp. and Huawei Technologies Co. Ltd. are under pressure from the U.S. amid ongoing trade tensions between the two countries. ZTE was banned for several months in 2018 by the U.S. Ministry of Commerce, while U.S. federal agencies are not allowed to use Huawei products.

The cases have had a direct impact on M&A activity in China's chip industry, according to Rick Hsu, a technology analyst at Daiwa Securities.

Last year still saw three deals make it onto the top 10 Chinese semiconductor and semiconductor equipment M&A list for 2016-2018, ranked by transaction value. They include GigaDevice Semiconductor (Beijing) Inc.'s purchase of Silead Inc. for US$423.9 million and Japan's SoftBank Group Corp.'s sale of a 51% stake in ARM Holdings PLC's Chinese operations to a group of undisclosed Chinese investors. The deal was valued at US$775 million.

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"It looks [like it is getting more] difficult for China to get critical technologies or intellectual property for the chip space," Hsu said. He added the increased difficulty of technology or intellectual property procurement will continue to impact China's M&A activity in 2019, referencing TSINGHUA UNIGROUP CO. Ltd.'s unsuccessful US$32 billion bid for U.S. memory chip maker Micron Technology Inc. in 2015. It was reportedly blocked due to national security concerns.

Analysts note that M&A in China's semiconductor industry has been muted for a few years. As such, the Chinese government has made the industry one of its core objectives under its "Made in China 2025" plan for self-sufficiency. The government also set up a specific National Integrated Circuit Industry Investment Fund Co. Ltd. to promote semiconductor growth in China. The fund has already invested almost 140 billion Chinese yuan.

Meanwhile, the number of placements made between 2016 and 2018 in the country's semiconductor industry has seen an uptick.

According to S&P Global Market Intelligence data, the number of private placements made by the entire sector, including private equity, venture capital and non-listed companies, in the semiconductor industry grew to 69 in 2018, up from 57 in 2017 and 63 in 2016.

The data shows that Tsinghua Unigroup led the top 10 Chinese private placements between 2016 and 2018, in terms of deal value, with a US$22.52 billion investment from China Development Bank and government-driven Huaxin Investment Management Co. Ltd. in March 2017.

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Analysts expect this trend to continue as China attempts to reduce its dependence on the U.S. market in light of recent trade tensions.

"It's likely we'll continue to see strong levels of investment into this sector, particularly as the trade war further exposes China's reliance on imported semiconductor devices," Marro concluded.