M&A at the Subsystem Supplier Level

An interesting and important shift has occurred during the past two years in the mergers and acquisitions (M&As) activity of subsystem and component suppliers. Prior to that time, most M&As were between like companies. Instrumentation companies purchased instrumentation companies, power supply companies purchased power supply companies, and software and automation companies purchased software and automation companies. Now, however, we have power supply companies purchasing instrumentation companies, instrumentation companies purchasing power supply companies, and hardware companies purchasing software companies. Why this change and what are the ramifications?

The story of Advanced Energy (AE) is a good example of the new dynamics. Four years ago, AE acquired RF Power Products, a supplier of rf power supplies, which was a good complement to AE's strength in dc power supplies. Similar acquisitions were being made in other fields. For example, leaders in instrumentation were purchasing smaller instrumentation companies that provided complementary strengths to their already existing product lines.

Three years ago, with its market share in power supplies already >50% in the combined semiconductor, data storage and flat-panel markets, AE began to assess how it could continue to provide more value to its customers. AE had been growing in large part through market-share gains, and this option was not going to be available for much longer. It was at this time that AE decided to expand its product portfolio beyond power supplies, and add other components and subsystems that were of value to its customers.

Two years ago, with the acquisition of Noah Precision, a supplier of advanced temperature control systems, AE made its first departure from power supplies. A short time later, AE acquired Sekidenko, a supplier of temperature measurement systems; and EMCO, a supplier of an advanced concept in mass flow control.

This M&A activity has the potential to create advantages for the industry as a whole, as well as for each company. Equipment manufacturers have been looking forward to having fewer, but larger, suppliers. In addition, component and subsystem suppliers with broad product portfolios are in an ideal position to take advantage of the synergies present among the different subsystems. In fact, OEMs are already touting the benefits to be gained from integrating the components and subsystems.

One of the biggest opportunities for synergy is with the integration of hardware and software for e-diagnostics and advanced process control (APC). Although the presence of larger suppliers and the opportunity for one-stop shopping brought about by this M&A activity are attractive, the real benefit to be gained is the creation of new products that lead to better results for the device manufacturers. E-diagnostics and APC are excellent examples. In each of these cases, the subsystem supplier is providing a combination of hardware, software and embedded knowledge that would not be possible from a supplier dealing with only one type of component or subsystem.

There are risks, though, associated with this new type of M&A activity. When companies acquired companies in the same field, they usually could pick their time. As such, they could make sure they were well prepared for the acquisition and subsequent integration. They could begin with small acquisitions and allow time for the organization to learn how to carry out the integration effectively before taking on other acquisitions. They could also work their way up from small to larger acquisitions.

The time required for organizational learning can be deceptive. It is easy to jump to the conclusion that organizational learning is merely the sum of all the individual learning. However, this approach overlooks the interdependencies that must be accommodated in organizational learning that do not exist in the case of individual learning. In addition, company cultures frequently must be changed to implement an effective integration. The end result of these differences is that it can take a surprisingly long time for a company to learn how to integrate new acquisitions effectively.

Once the organizational learning is accomplished, though, the learning and experience can be highly beneficial. In their book, The Complete Guide to Mergers and Acquisitions, Timothy Galpin and Mark Herndon note the comment of a CEO of a major manufacturing company as his company began the integration of its fourth M&A deal in 18 months — "Give me an integration team that knows the drill." As we all know, there is no substitute for experience. AE's earlier acquisitions of companies such as Noah Precision and Sekidenko were challenging, but they were integrated successfully. Now, as AE is integrating Aera — a much larger company with a more international scope — our experienced integration team is performing exceptionally well. Not only is AE benefiting from this skill, but our new Aera employees understand how they will be part of the AE family, and they have contributed significantly to the integration.

Because of the significant market opportunities for subsystem suppliers, it is clear that the pace of M&A activity will only gain momentum in the foreseeable future. If done well, these mergers and acquisitions can be highly beneficial for all levels of the semiconductor supply chain.